FOEEIG:t;r  EXOHAE"GE. 


Foreign  Exchange 

AN  ELEMENTARY  TREATISE  DESIGNED 

FOR    THE    USE  OF  THE    BANKER.    THE 

BUSINESS  MAN  AND  THE  STUDENT. 


e^ 


Reprinted  from  a  Series  of  Articles  Published 

in  the 

NEW  YORK  FINANCIER 


e^ 


NEW    YORK 
THE     FINANCIER     COMPANY 

I  902 


•        '    *^rt  ♦    »      • 


fi^"^^ 


^^^<<^ 


^^. 


COPTEIGHT,   1902. 

By  the  FINANCIEB  COMPANY. 


Published  October^   igo2. 


C0I!^TENTS. 


PAGE 

Introduction  1 

CHAPTER  I. 

Definition     of     Exchange — ^Points     of     similarity  *^ 

between  the  domestic  and  the  foreign  bill 

Some  operations  in  foreign  exchange  more  or 
less  intricate — ^Magnitude  of  the  business  in  ex- 
change— Large  capital  not  essential  for  success 
in  ordinary  operation — Transactions  in  commer- 
cial bills  recommended  to  banks 4 — 11 

CHAPTER  II. 

Domestic   exchange — Its    origin,    termination   and 
functions — How    balances    resulting    therefrom 
are   adjusted — Transfers   of   money   at  a   mini- 
mum of  cost — Periodicity  of  movements  of  cur-  I 
rency — Notable  instances  of  transmission  of  gold                        !• 
through  the  mails  and  of  telegraphic  transfers 

through  the  Treasury 12 — 18 

CHAPTER  III. 

Commercial  foreign  exchange — How  it  originates 
and  terminates  and  how  it  is  negotiated — ^A 
hypothetical  translation  in  cotton  bills  as  an 
illustration — Profitable  results  usually  obtainable 

from  operations  in  commercial  bills 19 — 23 

CHAPTER  IV.  I 

Commercial  exchange  drafts  against  commodities 
shipped  on  foreign  order — ^An  export  of  flour 
taken    for   illustration — Documents    accompany-  ^ 

ing  the  draft  explained— How  the  profit  is  rea-  | 

Ilzed    24—31  i 

6  I  rj  fi  no 


Vi  FOREIGN    EXCHANGE. 

CHAPTER  V. 
Profits  of  foreign  excliange  business — The  margin 
narrow  in  cities  but  larger  at  interior  points — 
Suggestions  for  the  employment  of  country  bal- 
ances— ^The  South  American  field  open  for  ex- 
change operations 32 — 36^ 

CHAPTER  VI. 

Erroneous  forecasts  of  exchange  conditions — 
Effect  upon  the  market  of  the  failure  of  the  corn 
crop  in  1901 — Derangements  resulting  from  over- 
sold commercial  bills 37 — 40 

CHAPTER  VII. 

The  study  of  the  science  of  exchange — Paucity  of 
text  books — General  use   of  exchange   tables — 
Norman's    system    of    calculations — How    fixed 
pars  of  exchange  are  computed  in  his  Cambist. .     41 — 46^ 
CHAPTER  VIII. 

Tate's  manual  of  foreign  exchanges — Mathemati- 
cal computations  facilitated  by  the  establish- 
ment of  the  single  gold  standard — The  coinage 

of   Great  Britain 47—52 

CHAPTER  IX. 

International  gold  certificates — ^A  device  for  sub- 
stituting for  gold  drafts  which  could  be  availed 

of  by  tourists — ^Feasibility  of  the  plan 53 — 56 

CHAPTER  X. 

The  origin  and  history  of  the  Troy  pound — Great 
Britain's  standard  of  weight  for  three  and  three- 
quarter  centuries — Its  existence  for  two  hundred 
and  sixty  years  without  official  recognition — A 

copy  of  the  standard  in  use  in  our  mints 57 — 61 

CHAPTER  XI. 

The  metric  system — ^Experimentation  for  two  and 
a  half  centuries  before  the  attainment  of  perfec- 
tion— The  gramme  substituted  for  the  Troy  grain 
In  mint  assays 62 — 67 


I 


CONTENTS.  vll 

CHAPTER  XII. 
Effect  of  money  rates  upon  exchange — Credits 
advantageously  employed  in  Europe  in  1896 — 
How  foreign  loans  were  then  effected  through 
investment  bills — A  reversal  of  monetary  con- 
ditions in  1901  caused  large  borrowing  of  foreign 
capital    68—72^ 

CHAPTER  XIII. 
The  influence  of  exchange  upon  rates  for  money — 
How  the  London  discount  market  is  sought  to 
be  controlled  by  the  Bank  of  England — ^With- 
drawals of  gold  retarded  by  an  advance  in  dis- 
counts— Sensitiveness  of  money  to  exchange  con- 
ditions        73 — 7^ 

CHAPTER  XIV. 
Consideration   of   the   International    Trade   situa- 
tion   necessary    in    exchange    operations — Neu- 
tralizing effect  upon  favorable  trade  conditions 
of  a  return  movement  of  securities 77 — 81 

CHAPTER  XV. 
The  International  balance  of  trade — ^How  favor- 
able balances  are  currently  liquidated — No  ac- 
cumulation of  foreign  indebtednessi  resulting 
from  trade  movements — Securities  the  principal 
medium   for   adjustment   of   balances 82 — 87 

CHAPTER  XVI. 
Why  Germans  are  experienced  Cambists — The  sys- 
tem of  instruction  in  schools  thorough — Careful 
training  in  counting  houses  and  banks — How  im- 
perfections in  the  early  education  of  Americans 

can   be    remedied 88 — 91 

CHAPTER  XVII. 

Arbitration    of    exchange — Developments    of    this 

branch  of  exchange  operations — Illustration   of 

arbitration  through  London  on  Paris — How  gold 

•  was   profitably   exported   hence   to  the   French 


viii  FOREJIGN  EXCHANGE. 

capital  in  1901 — ^Accurate  information  and  ex- 
pert skill  essential  for  success  in  such  opera- 
tions—Difference between  arbitration  and  arbi- 
trage negotiations 91 — 97 

CHAPTER  XVni. 

Suggestions  for  exchange  students — Desirability 
of  obtaining  positions  where  opportunities  for 
practical  knowledge  may  be  had — ^Verification  of 
exchange  calculations  useful — The  basis  for  com- 
putations of  fixed  pars  of  exchange — How  close 
Quotations  are  figured  in  transactions  in  bills. .  98 — 103 
CHAPTER  XIX. 

CJomputations  of  French  exchange — ^Peculiarity  of 
the  quotations  for  francs — Small  supplies  of  this 
class   of   bills-  in   our   market — Illustrations   of 
indirect  remittance  to  Paris  through  London ....  104 — 108 
CHAPTER  XX. 

German  exchange  computations — ^Methods  of  quot- 
ing reichsmarks— Arbitration  operations  through 
London — The  calculations  in  Brooks'  tables  com- 
mended     109—112 

CHAPTER  XXI. 

Monetary  units  and  pars  of  exchange  of  various 
Continental  and  Asiatic  countries — The  basis  on 

which  pars  are  computed , 113 — 118 

CHAPTER  XXII. 

The  trans-Atlantic  cable  and  exchange  operations 
— ^Every  commercial  centre  of  the  world  now  in  j| 

telegraphic   communication — Arbitrage    and    ar-  " 

bitration  transactions  facilitated — ^The  element 
of  chance  entirely  eliminated — Cable  tolls  re- 
duced to  a  minimum — Cable  transfers  of  gold — 

How  the  Philippines  indemnity  was  paid 119 — 124 

CHAPTER  XXIII. 

Advantages  of  the  proposed  trans-Pacific  cable — 
Obstacles  to   its   construction  now  overcome — 


CONTENTS.  Ix 

Length  of  the  sections  of  the  new  line — Our 
commerce  with  the  Orient  will  be  promoted  by 
the  installation  of  the  cable  and  exchange  tran- 
sactions facilitated — Manila  the  base  for  our 
Oriental  commercial  and  financial  operations . . .  125 — 128 

CHAPTER  XXIV. 
Financial  and  exchange  operations  in  the  Orient 
— The   business   controlled   by  foreign   banks — 
How  exchange   is   negotiated — ^A  recent   move- 
ment of  gold  hither  from  Australia  explained . .  129 — 134 

CHAPTER  XXV. 

How  the  gold  basis  for  exchange  is  calculated — 
The  weight  and  fineness  of  the  chief  monies  of 
account  in  sixteen  gold  standard  countries — 
Values  as  stated  by  the  United  States  Mint  Di- 
rector— The   price   of  gold   established   by   law 

and  uniformity  thereof  secured 135 — 141 

CHAPTER  XXVI. 

The  country's  accumulation  of  gold — While  Euro- 
pean banks  jealously  guard  their  stacks  of  the 
metal  our  Treasury  holdings  thereof  are  unpro- 
tected by  restrictive  regulations — Gold  for  ex- 
port supplied  at  only  nominal  charge  for  bars — 
Facilities  extended  to  importers  of  gold  at  Pacific 

coast  points 142 — 146 

CHAPTER  XXVII. 

Tables  for  the  ready  conversion  of  interest  into 
American  currency — Illustrations  of  the  method 
of  making  calculations — The  use  of  decimals 
in  sterling  exchange  computations — Examples 
for  conversion  and  of  operations  in  interest  of 

duty   on    importations 147 — 152 

APPENDIX. 

Foreign  exchange  elucidated  in  a  lecture  before 
the  students  of  the  University  of  Chicago  by 
H.   K.   Brooks 153—184 


FOEEIGlSr  EXOHAl^GE 

A  I^EGLECTED   FIELD   I]^  AMEEI- 

CAI^  BAKKII^G 


II^TEODUCTIOI^ 

In  June,  1901,  ^^The  Financier"  began  the  publi- 
cation of  a  series  of  articles  upon  Foreign  Ex- 
change, which  were  continued  until  February  of  the 
following  year.  The  articles  attracted  much  atten- 
tion and,  in  response  to  numerous  requests,  the  pub- 
lisher of  this  paper  decided  to  issue  the  articles  in 
book  form,  believing  that  the  interest  which  had 
been  manifested  in  them  would  justify  such  re-pub- 
lication. 

This  work  is  not"  a  text  book  on  Foreign  Ex- 
change. It  is  an  elementary  treatise,  explaining,  in 
simple  language,  the  essential  principles  of  this 
science,  the  basis  for  and  the  methods  of  computa- 
tion of  pars  of  exchange,  and  how  operations  in  ex- 
change in  their  various  forms  are  conducted.  The 
expositions  of  the  manner  of  ascertaining  pars  of 
exchange  are  one  of  the  features  of  this  work, which 
is  almost  entirely  new  in  the  sense  that  it  has  not 
before  been  so  directly  and  clearly  presented  by  any 
of  the  Cambists,  or  skilled  writers  on  the  science, 
whose  publications  have  hitherto  been  issued,  with, 
perhaps,  the  sole  exception  of  Norman,  who  sought 
to  introduce  a  universal  system  of  computations  of 
exchange  based  upon  fixed  constants.    Aided  by  the 


s\3  e/j  jy,  {  ) .: :   foj^e^ign  exchange. 

above  noted  exposition  of  the  method  for  the  ascer- 
tainment of  the  pars  of  exchange,  which  pars  it  is 
shown,  are  based  upon  the  unvarying,  because  es- 
tablished by  coinage  laws,  weight  and  fineness  of 
the  gold  contained  in  the  monetary  unit  of  the  dif- 
ferent commercial  countries  of  the  world,  having  a 
gold  standard,  the  student  is  enabled  at  once  to 
grasp  the  underlying  principle  of  exchange  opera- 
tions, and  the  working  of  the  various  problems  in 
this  science  is  thereby  greatly  facilitated.    Among 
the  other  of  the  many  important  features  of  this 
work  is  the  chapter  on  International  balance  of 
Trade.     This   controverts  the  hitherto  popularly 
maintained  theory  of  an  accumulation  of  the  credit 
balances  which  result  from  the  net  export  move- 
ment of  merchandise  and  gold  and  silver  after  the 
deduction  from  such  balances  of  what  is  called  the 
"invisible  balance" — by  which  is  meant  the  vari- 
ously estimated  sums  of  the  items  which  are  charge- 
able against  the  export  movement  of  commodities; 
the  expenditures  of  tourists  and  of  Americans  re- 
siding abroad  and  of  interest  on  investments  in 
American  securities  held  in  Europe.     Instead  of 
there  being  such  an  accumulation  of  credit  balances, 
it  is  shown  that  there  is  constantly  in  progress, 
through  the  operations  of  foreign  bankers,  current 
liquidations  of  such  balances  either  with  securities 
or  otherwise,  so  that  at  no  time  can  it  be  truthfully 
said  that  there  exists   an  unliquidated   balance, 
other  than  that  which  is  in  process  of  adjustment 
through  maturing  exchange  drafts.    Still  other  im- 
portant features  of  the  work  are  chapters  on  the 
dominating  influence  of  money  upon  exchange  and 
of  exchange  upon  money;  on  the  revolution  wrought 


INTRODUCTION.  S 

by  the  Transatlantic  cable  in  the  conduction  of  ex- 
change operations;  on  American  banking  in  the 
Orient  and  its  expected  promotion,  through  the  pro- 
jected Trans-Pacific  cable,  and  on  the  scientific 
study  of  exchange  as  suggested  by  modern  Cam- 
bists. 

The  aridity  common  to  most  works  of  an  educa- 
tional character  is  sought  to  be  relieved  in  this  book 
by  the  introduction  of  chapters  containing  sub- 
jects of  general  interest,  such  as  the  origin  of  the 
Troy  pound  and  the  gradual  process  through  which 
this  standard  of  weight  was  brought  to  perfection; 
the  origin  and  history  of  the  metric  system;  the 
suggestion  of  a  plan  for  International  gold  certifi- 
cates, which  are  intended  to  minimize  the  move- 
ment of  the  metal  between  this  country  and  Eu- 
rope, and  to  be  used  for  the  convenience  of  tourists, 
and  accurately  computed  tables  for  the  ready  con- 
version of  English  into  United  States  currency. 

If  through  this  publication  bankers  in  the  inte- 
rior or  elsewhere  in  the  country  shall  become 
so  far  interested  in  the  business  of  exchange  as  to 
embrace  the  opportunities  which  are  almost  con- 
stantly offered  for  profitable  operations  therein; 
and  if  junior  employes  of  banks  shall,  through  the 
perusal  of  this  work,  be  encouraged  thoroughly  to 
study  this  science  with  a  view  to  obtaining  the 
equipment  necessary  for  the  successful  conduct  of 
the  business,  the  labors  of  the  author  and  the  enter- 
prise of  the  publisher  will  have  been  amply  re- 
warded. 


CHAPTER   1. 

DEFINITION  OF  EXCHANGE— POINTS  OF  SIMILARITY 
BETWEEN  THE  DOMESTIC  AND  THE  FOREIGN 
BILL— SOME  OPERATIONS  IN  FOREIGN  EX- 
CHANGE MORE  OR  LESS  INTRICATE— MAGNI- 
TUDE OF  THE  BUSINESS  IN  EXCHANGE— LARGE 
CAPITAL  NOT  ESSENTIAL  FOR  SUCCESS  IN  OR- 
DINARY OPERATIONS— TRANSACTIONS  IN  COM- 
MERCIAL BILLS  RECOMMENDED  TO  BANKS. 

The  definition  of  exchange  is  barter.  Centuries 
ago,  before  tokens  representing  values  were  de- 
vised, business  transactions  between  individuals 
were  conducted  through  the  exchange  or  barter  of 
one  thing  of  value  for  another  thing  of  different 
value.  Then  followed  the  substitution  of  represen- 
tatives of  value,  called  money,  for  the  thing  or 
things  bartered  and  gradually  the  science  of  ex- 
change was  evolved,  money  or  negotiable  instru- 
ments, adjustable  with  money,  being  the  interme- 
diary. 

Bankers  as  well  as  dealers  in  commodities  or 
other  things  of  value  are  more  or  less  familiar  with 
operations  in  domestic  exchange  throughout  the 
various  processes  of  negotiation  from  the  creation 
to  the  termination  of  the  instrument.  Hence  there 
should  be  little  difficulty  in  acquiring  a  knowledge 
of  the  principles  which  govern  foreign  exchange 
transactions.   The  two  classes  of  exchange  are  simi- 


DEFINITION  OF  EXCHANGE.  S 

lar  as  regards  origin  and  final  settlement,  the  do- 
mestic bill  being  the  instrument  representing  the 
value  of  a  thing  locally  treated  while  the  foreign 
bill  represents  the  value  of  the  thing,  whether  it  be 
a  commodity  or  a  security  passing  from  the  posses- 
sion of  a  domestic  to  that  of  a  foreign  holder.  In 
the  one  case  the  operation  results  in  the  transfer 
of  a  credit  between  domestic  points;  in  the  other 
case  such  transfer  is  made  between  a  domestic  and 
a  foreign  point  or  centre. 

Ordinary  forms  of  foreign  exchange  operations 
are  easily  understandable  by  all  who  handle  the 
domestic  draft  and  they  are  capable  of  being  suc- 
cessfully conducted  by  banks  and  also  by  individ- 
uals who  have  opportunity  and  facilities  therefor. 
There  are,  however,  other  forms  of  exchange  opera- 
tions which  are  more  or  less  intricate  by  reason  of 
the  fact  that  different  currencies  and  monetary  and 
trade  conditions  are  almost  constantly  encountered, 
making  necessary  the  possession  of  accurate  know- 
ledge of  such  conditions  in  order  to  take  advantage 
of  opportunities  for  the  profitable  conduct  of  ex- 
change operations.  Moreover  technical  training 
and  practical  experience  are  indispensable  to  suc- 
cess in  the  more  intricate  operations  in  exchange 
and  these  can  be  acquired  only  through  study  and 
close  observation. 

Because  of  these  intricate  details,  expert  mana- 
gers of  foreign  exchange  departments  in  banking 
houses  are  always  in  request,  commanding  salaries 
usually  far  greater  than  those  in  almost  any  other 
department  of  banking.  Therefore  there  would 
seem  to  be  a  strong  incentive  for  young  men  who 
are  entering,  or  who  have  already  entered,  upon  a 


6  FOREIGN  EXCHANGE. 

banking  career,,  to  devote  their  attention  to  a 
thorough  and  systematic  study  of  the  methods  of 
conducting  this  branch  of  business. 

Until  within  a  few  years  the  handling  of  ex- 
change was  almost  wholly  monopolized  by  foreign 
banking  houses,  who  built  up  an  enormous  and 
highly  profitable  business  and  established  agencies 
and  secured  correspondents  in  every  commercial 
and  financial  centre  of  the  world.  The  success 
which  attended  these  enterprises  naturally  invited 
competition,  and  latterly  many  American  banks  of 
deposit  and  other  financial  corporations  have  en- 
tered the  field  through  the  establishment  of  ex- 
change departments,  enlisting  the  co-operation  of 
their  country  correspondents  and  forming  indirect 
alliances  with  small  banks  at  distributing  centres. 
This  branch  of  their  business  has  already  grown  to 
be  highly  important.  There  would  seem  to  be  no 
good  reason  why  banks  located  at  distant  domestic 
points,  through  which  grain,  cotton,  provisions, 
manufactured  goods  or  other  exports  move  to  the 
seaboard,  should  not  take  measures  to  intercept 
some  of  the  foreign  exchange  which  is  drawn 
against  these  exports,  and  thus  obtain  a  share  of 
the  business  resulting  from  this  movement. 

The  magnitude  of  the  volume  of  business  in  for- 
eign exchange  is  indicated  by  the  fact  that  the  inter- 
national commerce  of  the  country,  represented  by 
merchandise  exports  and  imports,  has  grown  from 
$1,687,416,797  in  the  calendar  year  1896,  to  $2,345,- 
801,975  in  1901,  and  is  still  expanding.  The  amounts 
it  may  be  observed,  do  not  include  the  movements 
of  gold  and  silver,  against  which  exchange  is  also 
drawn;  neither  do  they  include  the  vast  and  un- 


DEFINITION  OF  EXCHANGE.  7 

known  volume  of  securities  of  various  kinds  which 
constantly  move  between  this  country  and  Europe, 
the  expenditures  of  foreign  tourists  and  of  Ameri- 
cans residing  abroad  and  the  necessary  outlays 
incident  to  the  transportation  of  the  country's 
commerce,  all  of  which  add  to  the  volume  of  ex- 
change transactions. 

An  impression  doubtless  prevails  among  banks 
generally  that  much  capital  is  essential  for  the  suc- 
cessful conduct  of  the  foreign  exchange  business, 
and  hence  that  those  banking  institutions  which 
have  only  sufficient  capital  for  their  domestic  re- 
quirements should  refrain  from  attempts  to  engage 
in  foreign  exchange  operations.  The  amount  of 
capital  which  is  required  for  conducting  business  in 
foreign  exchange  depends,  of  course,  upon  the  ex- 
tent to  which  the  banker  becomes  committed, 
through  his  efforts  to  compete  with  rival  houses  in 
contracts  incidental  to,  though  not  necessarily  a 
part  of^the  business  of  operating  in  foreign  ex- 
change. For  example,  it  may  be  advantageous  to 
a  banker  to  deal  largely  in  speculative  transactions 
in  stocks  or  bonds  through  the  cable  or  through 
other  exchange  drafts,  thus  conducting  what  is 
known  as  an  arbitrage  business,  which  may  at 
times  require  the  use  of  a  large  amount  of  capital. 
Or  there  may  be  occasions  when  he  will  have  oppor- 
tunities to  participate  in  the  negotiations  of  new 
securities  or  those  which  have  not  been  placed 
either  upon  the  domestic  or  the  foreign  markets, 
and  while  awaiting  the  digestion  of  these  proper- 
ties he  will  be  required  to  tie  up  a  certain  amount 
of  his  capital.  If  such  capital  were  not  large  this 
teipporary  employment  of  it  might  embarrass  other 


8  FOREIGN  EXCHANGE 

operations.  Such  cases,  however,  are  exceptional, 
and  out  of  the  great  number  of  exchange  houses  in 
this  country  which  handle  foreign  bills,  compara- 
tively few  indulge  in  operations  of  this  magnitude. 
Indeed,  by  far  the  great  majority  of  these  bankers 
limit  their  business  to  buying  and  selling  of  ex- 
change against  commodities  and  to  operations  inci- 
dental thereto.  There  may  be  times  when  exchange 
which  has  originated  in  the  above  noted  arbitrage 
or  other  operations  will  be  traded  in  by  the  smaller 
houses,  but  such  trading  does  not  involve  any  in- 
creased capital  beyond  the  amount  required  for 
other  exchange  transactions.  Generally  speaking, 
houses  with  comparatively  small  capital  but  having 
sufficient  credits  with  their  foreign  correspondents, 
are  quite  successful  in  the  foreign  exchange  busi- 
ness. By  credits  we  do  not  mean  the  standing  or 
reputation  of  the  house,  based  upon  business  con- 
nection or  influence  or  established  through  refer- 
ences. What  is  meant  by  the  term  credits  is  cash 
or  the  proceeds  of  operations  in  exchange  drafts, 
which  cash,  until  withdrawn,  is  at  the  disposal  of 
the  house  represented  by  the  bill  whose  function 
has  terminated  in  its  payment. 

The  basis  for  a  commercial  bill  of  exchange  is  a 
commercial  transaction  of  an  international  char- 
acter, which  transaction  consists  in  the  purchase 
of  commodities  in  one  country  for  export  to  another 
country;  and  the  exchange  draft  represents  the 
money  value  which  is  due  the  exporter  of  the  com- 
modities. The  draft  either  accompanies  or  closely 
follows  the  shipment  of  the  commodities,  and  when 
the  draft,  after  being  accepted,  is  eventually  paid, 
the   proceeds   form   a   credit   against   which   the 


DEFINITION  OF  EXCHANGE.  9 

original  maker  of  the  draft  or  the  person  to  whom 
it  may  be  sold  may,  at  his  convenience,  draw.  It 
will  be  observed  that  the  outlay  required  for  such 
a  transaction  as  the  purchase  of  a  commercial  bill 
drawn  against  an  exported  commodity  depends 
upon  the  value  of  this  particular  consignment,  and 
as  such  shipments  are  of  various  quantities  and 
values  the  buyer  of  the  bill  has  a  wide  range  for 
selection.  Ordinarily  the  commercial  bill  drawn 
against  the  commodity  is  paid  within  ninety  days 
from  the  date  of  the  shipment.  The  transaction 
may  then  be  closed  by  the  purchaser  of  the  bill,  who 
may  sell  the  draft  which  is  made  against  the  credit 
which  has  resulted  from  the  payment  of  the  com- 
mercial draft;  or  the  purchaser  of  the  bill  may 
await  returns  from  the  draft  which  he  makes 
against  his  credit.  In  the  latter  case  the  final  clos- 
ing of  the  transaction  will  probably  require  an  addi- 
tional thirty  days.  It  should  be  noted,  however, 
that  if  at  any  time  between  the  acceptance  of  the 
commercial  bill  and  its  payment,  the  purchaser  of 
the  draft  should  desire  for  any  reason  to  close  the 
transaction  he  can  dispose  of  his  claim  in  the  mar- 
ket and  almost  always  at  a  profit,  for  as  the  bill 
approaches  maturity  it  appreciates  in  value.  The 
capital  required  for  an  operation  in  exchange  such 
as  is  here  described,  is  limitable,  as  above  noted,  by 
the  amount  of  the  transaction. 

The  proceeds  of  the  bill  can,  if  desired,  be  prompt- 
ly drawn  for  and  reinvested  in  another  transaction 
of  a  similar  character,  and  thus,  during  the  export 
season,  a  number  of  profitable  turns  may  be  made 
without  requiring  any  greater  amount  of  capital 
than  was  necessary  for  the  initial  transaction.    It 


10  FOREIGN  EXCHANGE. 

will  be  observed  also  that  the  process  of  trading  in 
exchange  is  very  similar  to  that  employed  in  making 
time  loans  or  in  the  purchase  of  commercial  paper, 
both  of  which  operations  are,  of  course,  familiar  to 
bankers.  In  the  case  of  time  loans  on  collateral, 
and  of  purchases  of  commercial  paper,  however,  the 
transactions  must  run  to  maturity,  while  in  the 
ease  of  the  purchase  of  a  bill  of  exchange  the  draft 
can  be  realized  upon  at  any  time  after  acceptance. 
In  addition  to  the  operations  in  exchange  above 
described  there  are  others  which  may  closely  follow 
the  establishment  of  the  credits  resulting  from  the 
purchase  of  commercial  bills  of  exchange.  The  long 
bill,  which  may  be  drawn  against  the  credit,  can  be 
loaned  against  collateral,  thus  making  a  sterling 
loan.  If,  instead  of  a  long,  a  short  bill  should  be 
drawn  against  the  credit,  it  can  be  sold  either  to 
remitters  or  to  parties  who  may  need  exchange  for 
other  purposes.  Indeed,  with  credits  established  in 
the  manner  indicated,  they  may  be  used  in  various 
profitable  ways,  and  banks  engaging  in  the  business 
will  soon  find  opportunities  for  thus  employing 
their  capital,  greatly  to  their  advantage. 

Considering  the  fact  that  during  many  months 
of  the  year  the  country  bank  balances  earn 
scarcely  anything  at  home,  it  is  not  surprising  that 
the  dividend  returns  of  the  majority  of  national 
banks  should  be  so  meagre.  In  those  periods  of  the 
year  when  crops  are  growing,  institutions  in  the 
interior  transfer  more  or  less  of  their  locally  un- 
employed balances  to  reserve  centres,  where  a  nomi- 
nal rate  of  interest  is  paid.  These  are  the  seasons 
when  tentative  operations  in  foreign  exchange  can 
be  made  by  such  country  banks,  and  in  this  way  a 


I 


DEFINITION  OF  BXCHANGB.  11 

profit  can  be  extracted  from  the  tranwaction,  which 
gain,  though  it  may  be  small,  will  at  least  go  a  little 
way  toward  increasing  the  aggregate  dividend  re- 
turn to  stockholders  of  the  institution.  Besides 
this  advantage  there  will  be  the  experience  acquired 
in  handling  foreign  exchange,  and  an  incentive  on 
the  part  of  the  bank's  managers  to  seek  opportuni- 
ties for  operations  in  exchange  drafts.  The  results 
of  a  single  season's  transactions  in  this  new  line  of 
business  would  doubtless  prove  so  satisfactory  that 
it  would  be  made  an  important  department  of  the 
bank.  That  banks  in  the  interior  are  gradually 
engaging  in  the  more  simple  forms  of  the  foreign 
exchange  business,  buying  and  selling  drafts  and 
issuing  letters  of  credit,  is  shown  by  the  announce- 
ments which  many  of  them  are  making  to  patrons 
in  their  advertisements,  and  it  is  probable  that  dur- 
ing the  current  export  season  the  number  of  these 
banks,  especially  those  which  are  located  in  the 
cotton  and  grain  sections  of  the  country,  will  in- 
crease. 


CHAPTER  II. 

DOMESTIC  EXCHANGE— ITS  ORIGIN,  TERMINATION 
AND  FUNCTIONS— HOW  BALANCES  RESULTING 
THEREFROM  ARE  ADJUSTED— TRANSFERS  OF 
MONEY  AT  A  MINIMUM  OF  COST— PERIODICITY 
OF  MOVEMENTS  OF  CURRENCY— NOTABLE  IN- 
STANCES OF  TRANSMISSION  OF  GOLD  THROUGH 
THE  MAIL  AND  OF  TELEGRAPHIC  TRANSFER 
THROUGH  THE  TREASURY. 

Theoretically,  domestic  exchange  and  foreign  ex- 
change so  closely  correspond  in  their  origin  and 
functions  as  to  enable  a  student  of  the  one  to  ob- 
tain a  clear  understanding  of  the  underlying  prin- 
ciples governing  the  other.  While  the  functions  of 
the  two  classes  of  exchange  are  similar,  their  re- 
spective spheres  of  operation  differ.  Foreign  ex- 
change is  employed  to  settle  transactions  between 
this  country  and  the  rest  of  the  world,  while  domes- 
tic exchange  settles  such  transactions  within  more 
circumscribed  limits.  There  is  at  times  a  plethora 
or  an  accumulation  of  exchange  on  New  York  at 
certain  points,  and  a  deficiency  in  the  supply  at 
other  points,  or  vice  versa,  this  city  being  the  finan- 
cial centre  of  the  country,  as  London  is  the  interna- 
tional financial  centre.  There  is  also  at  times  a 
plethora  and  at  others  a  dearth  of  exchange  be- 
tween New  York  and  London.  In  each  case  the 
plethora  is  reflected  in  rates  for  exchange  at  a  dis- 


DOMESTIC  EXCHANGE.  18 

count,  while  the  dearth  is  shown  by  the  premium  in 
the  rates,  this  discount  or  premium  being  based 
upon  the  cost  of  the  transportation  of  the  actual 
money  employed  and  the  time  cost  involved  in  mak- 
ing the  settlement.  In  some  sections,  particularly 
in  the  south,  rates  for  exchange  fluctuate  from  pre- 
mium to  discount,  according  to  supply  and  demand 
and  facility  of  movement  with  remarkable  regu- 
larity, and  this  change  also  reflects  the  extent  of 
the  banking  facilities  of  the  section  as  well  as  the 
periodical  movement  of  special  crops.  In  other  sec- 
tions of  the  country,  notably  at  Western  centres, 
rates  for  exchange  move  only  slightly  from  the  par 
point  between  the  crop  seasons  unless  there  should 
be  unusual  monetary  disturbance  at  New  York. 

Regarding  New  York  as  the  financial  centre  of  a 
great  commercial  domestic  zone,  we  find  embraced 
within  this  area  zones  of  more  or  less  importance 
representing  manufacturing,  agricultural,  mining 
and  mercantile  enterprises,  each  zone  having  its 
own  centre.  Exchange  originating  in  these  smaller 
zones  moves  to  and  through  the  centres  thereof, 
and  should  the  function  which  was  intended  at  its 
creation  not  be  performed  in  its  transit,  the  draft 
eventually  reaches  its  ultimate  destination,  where 
it  is  cleared  or  otherwise  settled. 

The  bill  may,  under  some  circumstances,  perform 
the  function  intended  at  its  creation  and  then  pass 
on  to  its  redemption  centre.  For  example,  a  draft 
upon  New  York  may  be  bought  at  Indianapolis  for 
the  purpose  of  discharging  a  debt  at  Cincinnati  or 
Chicago.  The  purchase  may  be  made  either  because 
the  Indianapolis  bank  has,  at  the  moment,  no  Cin- 
cinnati or  Chicago  funds,  or  because  exchange  on 


14  FOREIGN  EXCHANGE. 

New  York  may  be  in  request.  In  this  ease  the  draft 
is  forwarded  to  the  creditor  at  the  intermediate 
point  of  Cincinnati  or  Chicago,  where  the  debt  will 
be  discharged,  and  the  creditor  may  then  forward 
the  draft  to  New  York  for  final  payment.  Exchange 
originating  at  the  centres,  such  as  New  York,  for 
instance,  passes  onward  through  the  various  zones 
to  the  point  upon  which  it  is  drawn,  where  it  is 
finally  paid.  Thus  exchange  is  constantly  kept  in 
circulation  and  its  volume  is  measured  by  the  com- 
mercial and  business  transactions  of  the  country. 
Exchange  originates  with  commercial  or  business 
negotiations,  and  it  terminates  by  the  settlements 
in  cash  of  the  balances  involved  in  the  monetary 
transactions  at  the  different  clearing  houses  of  the 
country,  where  these  as  well  as  other  forms  of  in- 
debtedness are  adjusted.  Banks  drawing  domestic 
exchange  must,  as  a  matter  of  course,  keep  with 
their  correspondents  at  the  centres  at  which  the 
exchange  is  made  payable,  cash  balances  or  reserves 
sufficient  in  amount  to  meet  their  obligations,  and 
the  extent  of  this  balance  or  reserve  will  depend 
upon  the  volume  of  exchange  business  conducted  by 
the  bank.  If  this  reserve  is  not  reinforced  or  main- 
tained by  collectible  drafts  it  must  be  reinforced 
through  remittances  of  money. 

Whenever,  by  reason  of  a  deficiency  in  reserves 
or  in  the  supply  of  collectible  exchange  at  a  given 
point,  money  is  required  to  be  forwarded  to  that 
centre  to  meet  balances;  or  whenever,  in  conse- 
quence of  a  derangement  of  equilibrium  from  any 
cause,  it  is  desirable  to  transfer  bank  balances,  the 
banker  has  a  choice  of  several  methods  of  trans- 
mission.   As  express  charges  are  usually  high,  the 


I 


DOMESTIC  EXCHANGE.  15 

movement  by  this  method  is  the  last  resorted  to. 
Sometimes,  though  not  often,  the  recipient  of  the 
money  is  so  anxious  to  obtain  it  as  to  be  willing  to 
defray  either  the  whole  or  a  part  of  the  express 
charges.  In  some  cases  competition  for  country 
deposits  is  so  great  among  certain  institutions  in 
the  larger  cities  that  these  banks  not  only  offer  to 
pay  a  high  rate  of  interest  for  such  balances,  but 
to  assume  the  cost  of  transmission  both  ways,  in 
order  to  secure  the  account.  Another  method  of 
transfer  resorted  to  by  banks  at  large  centres  is 
registered  mail  transmission.  This,  however,  in- 
volves the  necessity  of  procuring  notes  of  large  de- 
nomination, thereby  reducing  the  bulk  of  the  pack- 
age, and  it  is  not  always  possible  to  obtain  such 
notes.  When  transfer  is  made  by  mail  the  cost  is 
usually  limited  to  the  postage  upon  the  weight  of 
the  package,  the  registration  stamp  and  the  fee  for 
insurance  while  in  transit.  Still  another  method  is 
the  assorting  out  by  the  transmitting  bank  of  cir- 
culating notes  of  other  national  banks  which  may 
have  been  received  in  the  course  of  business,  and 
forwarding  these  notes  to  the  redemption  bureau 
at  Washington,  which  is  done  at  the  expense  of  the 
note-issuing  bank.  In  return  the  remitting  bank  re- 
ceives legal  tender  through  any  Sub-Treasury  which 
may  be  designated  by  the  bank,  and  in  this  way 
funds  are  placed  with  the  institution's  correspond- 
ents at  convenient  points,  where  the  money  is  avail- 
able as  reserve.  Through  this  method  of  transfers 
the  cost  of  transmission  by  the  remitting  bank  is 
entirely  eliminated,  the  note  issuing  banks  paying 
all  charges  on  note  redemptions.  As  the  cost  of 
transporting  silver  dollars  is  borne  by  the  Treasury 


16  FOREIGN  EXCHANGES. 

Department,  this  method  of  transmission  is  fre- 
quently resorted  to  during  crop-moving  seasons. 

Movements  of  money  at  a  minimum  of  cost  are 
often  effected  between  centres  of  zones.  For  ex- 
ample, a  Chicago  bank  may  arrange  for  the  transfer 
of  currency  from  Cincinnati,  giving  in  exchange  a 
draft  upon  its  New  York  correspondent,  which 
draft  will  be  deposited  to  the  credit  of  the  Cincin- 
nati bank  with  its  correspondent  in  New  York.  This 
movement  would  involve  only  a  comparatively 
slight  express  charge  for  the  transfer  of  currency 
from  Cincinnati  to  Chicago,  the  draft  given  in  set- 
tlement passing  through  the  mail.  Such  move- 
ments as  these  are  said  to  be  frequent,  they  are  of 
great  convenience  to  banks,  particularly  in  west- 
ern, northwestern  and  southwestern  zones,  and  the 
volume  of  money  so  transmitted  is  often  large. 

Movements  of  currency  between  banks  in  the 
south  and  those  at  northern  centres  are  notable, 
for  their  periodicity.  This  is  due  to  the  fact  that 
the  capital  of  these  southern  banks  is  comparative- 
ly small,  or  suflScient  only  for  ordinary  needs,  and 
during  crop  movements  the  requirements  are  so 
great  that  drafts  have  to  be  made  upon  northern 
correspondents  based  upon  bank  loans  or  re-dis- 
counts. When  these  requirements  are  satisfied  the 
return  flow  of  currency  begins,  and  in  the  majority 
of  cases  the  express  companies  are  the  carriers. 
Competition  of  coast  line  water  routes,  with  over- 
land express  lines  will  account  for  the  lower  rates 
which  are  sometimes  observable. 

Until  the  resumption  in  1899  of  the  issue  of  gold 
certificates  by  the  Treasury  Department,  it  often 
became  necessary  to  supply  deficiencies  in  money 


DOMESTIC  EXCHANGE.  17 

at  western  points' by  transmitting  gold.  Express 
charges  for  this  service  were  high,  and,  consequent- 
ly, resort  was  had  to  the  mails.  The  coin  was  en- 
closed in  cartons  containing  |1,000  each,  weighing 
3.6857  pounds,  or  58.9712  ounces,  the  regular  post- 
age on  which  was  59  cents,  while  8  cents  additional 
was  paid  for  the  registration  stamp.  By  this  method 
gold  coin  was  transferred  between  distant  points, 
and  it  has  been  brought  from  San  Francisco  to  New 
York  at  a  much  less  cost  than  by  express  and  with 
equal  safety.  Since  the  issue  of  gold  certificates, 
however,  transportation  of  gold  by  mail  has  become 
unnecessary,  gold  certificates  of  large  denomina- 
tion, which  can  be  sent  by  mail,  being  easily  pro- 
curable. 

In  March,  1902,  a  syndicate  of  bankers  in  New 
York,  who  had  a  large  payment  to  make  in  San 
Francisco,  arranged  with  the  Treasury  Department 
for  the  transfer  of  |20,000,000  gold  to  the  latter 
city  to  save  the  maximum  cost  of  exchange,  about 
f  1.50  per  |1,000  on  that  point.  The  transfer  was, 
however,  not  made  by  these  bankers,  they  obtaining 
suflScient  exchange,  at  a  minimum  of  cost,  from  ex- 
press companies  and  bankers  who  preferred  to 
make  a  reduction  in  their  rates  rather  than  have 
the  gold  transferred  through  the  Treasury.  Sub- 
sequently these  bankers  themselves  transferred 
14,000,000  gold  through  this  medium  for  the  pur- 
pose of  reimbursing  the  drafts  which  they  had  sold 
to  the  syndicate.  The  cost  of  the  transfer  was  75 
cents  for  each  lot,  this  sum  defraying  the  expense 
of  the  telegram.  The  gold  was  deposited  in  the 
New  York  Sub-Treasury  and  the  transfer  order  was 
paid   at   San   Francisco.     Had   the   above   noted 


18  FOREIGN  EXCHANGE. 

amount  of  |20,000,000  been  transferred,  the  New 
York  money  market  would  have  been  seriously  de- 
ranged by  the  withdrawal  of  this  sum  from  the 
banks,  and  this  was  probably  one  reason  why  the 
bankers  representing  San  Francisco  institutions 
made  concessions  in  their  rates  for  exchange. 


I 


CHAPTER   III. 

COMMERCIAL  FOREIGN  EXCHANGE— HOW  IT  ORIGI- 
NATES AND  TERMINATES  AND  HOW  IT  IS  NEGO- 
TIATED—A HYPOTHETICAL  TRANSACTION  IN 
COTTON  BILLS  AS  AN  ILLUSTRATION— PROFITA- 
BLE RESULTS  USUALLY  OBTAINABLE  FROM 
OPERATIONS  IN  COMMERCIAL  BILLS. 

Foreign  Bills  of  exchange  are  divided  into  two 
classes — commercial  bills,  which  are  drawn  against 
commodities  such  as  cotton,  grain,  provisions  and 
other  products,  and  bankers'  bills,  which  are  drawn 
against  the  credits  which  result  from  the  payment 
of  the  commercial  bill,  and  also  against  securities 
when  these  take  the  place,  or  rather  supplement 
the  use  of  exchange  as  a  medium  of  settling  ac- 
counts between  parties  residing  at  a  distance  from 
each  other.  When  gold  moves  between  countries 
it  is  as  an  article  of  merchandise,  and  bankers'  bills 
are  drawn  against  the  movement  in  the  same  man- 
ner as  commercial  bills  would  be  drawn  against  a 
movement  of  commodities,  though  the  drafts 
against  gold  would  be  payable  in  the  briefest  possi- 
ble interval  of  time  to  save  interest  charges  which, 
under  the  conditions  calling  for  such  an  unusual 
movement,  would  be  abnormally  high. 

There  is  a  further  distinction  which  should  be 
noted  between  commercial  and  bankers'  bills,  and 


20  FOREIGN  EXCHANGE. 

that  is  that  the  former  are  always  drawn  payable  in 
from  sixty  to  ninety  days,  or  perhaps,  in  extreme 
cases,  even  longer,  while  bankers'  bills  are  drawn 
in  three  classes — sixty  or  seventy,  and  sometimes, 
though  not  often,  ninety  days,  and  demand  or  sight 
bills  and  cable  transfers,  which  latter  call  for  imme- 
diate payment. 

The  process  by  which  a  foreign  commercial  bill 
of  exchange  is  created  and  reaches  its  termina- 
tion may  best  be  illustrated  by  a  hypothetical  trans- 
action in  cotton,  this  commodity  being  selected  be- 
cause, owing  to  the  magnitude  of  the  export  move- 
ment, it  is  one  of  the  most  important  of  the  export- 
able commodities  of  the  country.  The  selection 
is  also  made  because  the  calculations  preliminary 
to  the  execution  or  the  creation  of  the  commercial 
bill  drawn  against  the  export  are  somewhat  intri- 
cate, while  those  which  are  necessary  to  the  crea- 
tion of  a  bill  against  almost  any  other  exportable 
commodity  are  comparatively  simple. 

Cotton  is  usually  bought  for  prompt  export  upon 
an  order  which  calls  for  the  staple  of  a  certain 
grade  and  at  a  fixed  price.  The  purchaser,  say  at 
New  Orleans,  executes  the  order  and  delivers  the 
cotton  on  board  a  vessel  for  shipment.  In  calculat- 
ing the  amount  of  the  draft  or  commercial  bill  of  ex- 
change drawn  against  the  cotton  he  takes  into  the 
account  the  first  cost  of  the  staple,  the  insurance, 
the  freight  to  Liverpool,  all  of  which  are  variable, 
and,  in  addition  to  these  items,  the  charges  at  the 
ports  of  New  Orleans  and  at  Liverpool,  the  loss 
incurred  by  the  difference  between  the  gross  and 
the  net  weight  of  the  bale — the  weight  at  New  Or- 
leans including  the  covering,  while  that  at  Liver- 


COMMERCIAL  FOREIGN  EXCHANGE  21 

pool  being  the  contents  of  the  bale — commissions, 
interest  and  other  minor  items.  The  total  of  these 
sums  represents  the  cost  of  the  cotton  delivered  at 
Liverpool,  and  the  bill  of  exchange  is  drawn  upon 
the  consignee  for  as  much  English  money  in  pounds, 
shillings  and  pence  as  will  cover  the  cost  of  the 
consignment,  less  a  certain  percentage  which  is,  in 
some  cases,  deducted  to  provide  for  reclamation  for 
short  weight,  inferior  grade,  damage  or  other 
causes.  The  bill  of  exchange,  which  is  drawn  in 
duplicate,  is  usually  promptly  sold  either  directly 
to  a  banker  in  this  city  or  to  some  representative  in 
New  Orleans  of  such  banker,  and  with  this  negotia- 
tion of  the  bill  the  interest  of  the  shipper  in  the 
transaction  ends.  The  banker  who  purchases  the 
bill  forwards  it  to  his  correspondent  at  Liverpool 
for  presentation  for  acceptance.  Payment  of  the 
bills  at  maturity  is  made  with  the  proceeds  of  the 
cotton.  The  bill  may,  under  some  conditions,  be 
discounted  at  the  Bank  of  England  rate  by  the 
acceptor,  or  it  may  be  held  by  the  correspondent 
until  it  matures  in  due  course.  In  either  case  the 
proceeds  of  the  bill  are  held  as  a  credit  to  await  the 
disposition  of  the  purchaser  of  the  draft.  When 
the  commercial  bill  is  paid  its  function  ceases. 

Bankers  in  the  cotton  or  other  agricultural  sec- 
tions of  the  country  who  are  familiar  with  the 
standing  and  responsibility  of  cotton  factors  or  of 
exporters  of  other  produce,  or  who  exercise  the 
same  care  in  investigating  such  standing  as  they  do 
that  of  makers  of  commercial  paper,  would  incur 
little  or  no  risk  in  purchasing  commercial  bills 
drawn  against  exportable  commodities.  The  profit 
resulting  from  such  purchase,   especially  during 


22  FOREIGN  EXCHANGE. 

active  exporting  seasons,  would  probably  be  satis- 
factory for  commercial  bills  drawn  upon  bankers, 
almost  invariably  sell  at  a  price  which  will  afford  a 
good  return  to  the  purchaser  of  the  bill,  and  com- 
mercial drafts  so  bought  could  be  promptly  sold 
through  the  bank's  correspondents  at  the  principal 
centres. 

One  way  by  which  a  local  banker  can  secure  a 
profit  through  the  indirect  negotiation  of  a  foreign 
bill  of  exchange,  originating  in  a  transaction  in  cot- 
ton or  other  exportable  commodities,  is  by  acting 
as  agent  or  representative  of  his  correspondent  in 
Chicago  or  other  Western  city  or  in  New  York.  The 
shipper  of  the  staple  naturally  desires  to  sell  his 
foreign  commercial  bill  at  as  great  an  advantage 
as  possible,  and  this  can  best  be  done  in  the  large 
cities.  He  may  be  so  circumstanced  that  it  is  neces- 
sary for  him  to  hypothecate  his  bill  for  the  procure- 
ment of  a  domestic  draft  upon  Chicago  or  New 
York.  In  this  case  the  local  bank  makes  the  domes- 
tic draft  upon  its  correspondent,  accepting  the  for- 
eign bill  of  exchange  as  collateral,  and  forwards 
this  collateral  to  its  correspondent  by  whom  the 
foreign  exchange  is  sold  to  a  foreign  banker,  and 
the  proceeds  are  used  for  the  payment  of  the  domes- 
tic draft  when  it  shall  be  presented.  In  such  a  case 
the  local  bank  makes  a  profit  upon  the  domestic 
bill  of  exchange,  and  possibly  a  commission  upon 
the  foreign  bill. 

The  banks  in  the  zone  of  which  the  agricultural 
section  is  the  centre,  may  be  called  upon,  in  some 
cases,  to  supply  to  a  buyer  of  an  exportable  staple, 
the  funds  with  which  to  make  his  purchase.  The 
loan  so  effected  would  have  to  be  made  upon  the 


COMMERCIAL  FOREIGN  EXCHANGE.  23 

credit  or  the  standing  of  the  borrower,  but  when 
the  latter  had  forwarded  his  staple  to  the  shipping 
point  and  had  procured  bills  of  lading  and  made 
the  foreign  draft  to  cover  his  shipment,  such  draft 
could  be  pledged  as  collateral  for  the  loan  and  the 
bank  could  reimburse  itself  for  the  advance  by  im- 
mediately negotiating  the  sale  of  the  draft  with  its 
correspondent. 

Some  of  the  most  successful  of  the  foreign  ex- 
change brokerage  concerns  in  New  York  first  estab- 
lished their  business  in  southern  and  western  agri- 
cultural sections,  where  they  bought  bills  of  ex- 
change drawn  against  exportable  products,  quickly 
turning  them  over  by  re-sale  to  banking  houses  in 
large  western  cities  or  in  New  York,  and  in  this  way 
they  gradually  acquired  an  intimate  knowledge  of 
the  business  and  at  the  same  time  secured  clients 
among  shippers  whose  bills  they  now  exclusively 
handle.  It  would  seem  to  be  possible  for  local  banks 
almost  everywhere  in  the  interior  likewise  to  build 
up  an  exchange  connection,  materially  adding  to 
the  profits  of  their  business. 

In  the  illustration  above  given  the  shipment  is 
made  to  and  the  draft  is  drawn  upon  Liverpool.  The 
process  would  be  the  same  were  the  transaction 
with  any  other  foreign  country  than  England,  with 
the  exception  that  the  commercial  bill  would  be 
drawn  for  the  money  of  that  country — ^f or  francs  in 
Prance,  marks  in  Germany,  roubles  in  Russia,  the 
yen  in  Japan,  etc. 


CHAPTER    IV. 

COMMERCIAL  EXCHANGE  DRAFTS  AGAINST  COM- 
MODITIES SHIPPED  ON  FOREIGN  ORDER— AN  EX- 
PORT OF  FLOUR  TAKEN  FOR  ILLUSTRATION- 
DOCUMENTS  ACCOMPANYING  THE  DRAFT  EX- 
PLAINED—HOW THE  PROFIT  IS  REALIZED. 

In  a  paper  prepared  by  John  M.  Grant,  which  was 
read  before  the  American  Institute  of  Bank  Clerks 
at  Chicago  in  November,  1891,  a  detailed  statement 
was  made  of  the  process  of  negotiating  a  commer- 
cial bill  of  exchange  drawn  upon  commodities,  the 
purchase  of  which  was  ordered  from  abroad  and 
executed  by  a  manufacturer  in  this  country.  The 
case  selected  for  illustration  is  that  of  a  dealer  in 
flour  in  Germany,  which  dealer  has  placed  an  order 
with  the  agent  of  a  large  exporter  of  flour  in  Min- 
nesota for  a  certain  number  of  sacks  of  so  many 
pounds  each.  The  question  of  payment  naturally 
comes  up,  and  the  dealer  in  Germany  is  informed 
that  it  will  be  necessary  for  him  to  instruct  his  bank 
to  open  a  commercial  credit  for  the  required  amount 
with  its  London  correspondent  in  favor  of  the  Min- 
nesota Company.  The  dealer  agrees  and  at  once 
applies  to  his  bank  for  the  credit,  giving  instruc- 
tions as  to  the  shipment,  how  the  drafts  are  to  be 
drawn,  what  disposition  is  to  be  made  of  the  docu- 
ments, and  stating  the  length  of  time  the  draft  is  to 


ITc 


COMMERCIAL  EXCHANGE  DRAFTS.  25 

remain  in  force.  If  the  dealer  is  in  good  standing 
the  bank  will  take  his  guarantee  that  the  drafts 
drawn  under  the  credit  will  meet  due  honor  at 
maturity,  and  will  make  such  other  terms  and  con- 
ditions as  are  customary  and  compatible  with  safe- 
ty. The  original  and  duplicate  of  the  credit  are 
handed  to  the  applicant,  who  keeps  the  duplicate 
and  forwards  the  original  to  the  shippers ;  the  trip- 
licate is  forwarded  by  the  German  bank  to  its  cor- 
respondents in  London,  on  whom  the  drafts  are  to 
be  drawn. 

Meanwhile  the  flour  agent  notifies  his  firm  in 
Minnesota  that  this  particular  dealer  has  given  him 
an  order  for  a  certain  number  of  sacks  of  a  certain 
brand  of  flour,  and  that  a  credit  has  been  opened  in 
London  that  will  cover  the  cost  of  the  goods  as  well 
as  the  freight  charges  from  Minnesota  to  their 
destination  in  Germany.  Soon  the  goods  are  ready 
to  be  shipped,  and  a  through  bill  of  lading  in  dupli- 

te  is  procured  from  the  forwarding  agent  as  a 

eceipt  for  the  shipment.    In  addition  to  the  bill  of 

lading  issued  to  the  shippers  another  is  issued, 

called  a  "Custom  House  Copy,"  for  the  use  of  the 

custom  house  officers  in  this  country. 

The  shippers  now  present  the  bill  of  lading  to  the 

surance  company  with  whom  they  hold  an  open 
olicy  for  marine  insurance,  and  receive  a  certifi- 
cate in  duplicate  to  the  effect  that  so  many  sacks  of 
flour  bearing  certain  marks  and  covered  by  a  bill  of 
lading  issued  by  a  certain  forwarding  agent,  have 
been  insured  against  loss  for  a  certain  amount,  usu- 
ally a  little  above  the  amount  of  the  draft.  An  in- 
voice is  then  made  out  in  duplicate,  the  original  of 
which  is  forwarded  to  the  consignee  of  the  goods, 


26  FOREIGN  EXCHANGE. 

and  the  duplicate  is  attached  to  the  draft,  together 
with  the  bill  of  lading,  insurance  certificate  and  let- 
ter of  hypothecation.  The  draft  is  drawn  in  dupli- 
cate at  thirty,  sixty  or  ninety  days'  sight,  according 
to  the  terms  of  the  credit,  is  payable  to  the  order  of 
"ourselves''  (meaning  the  drawers  or  shippers),  and 
is  drawn  on  the  London  banker  with  whom  the 
credit  has  been  opened. 

The  documents  covering  the  shipment  are  now 
complete  in  every  detail,  and  the  shippers  proceed 
to  realize  on  their  draft.  In  other  words,  instead  of 
waiting  for  the  time  limit  to  expire  they  sell  their 
draft  to  a  buyer  of  foreign  exchange  at  the  current 
rate  of  the  day  for  that  class  of  paper.  By  endors- 
ing the  draft,  insurance  certificate  and  bill  of  lading 
(which  of  course  they  are  required  to  do  in  order  to 
sell  the  draft)  the  shippers  virtually  renounce  all 
claim  to  the  merchandise,  and  the  banker  buying 
the  draft  has  thus  an  additional  security  in  the 
goods  over  and  above  that  which  he  already  pos- 
sessed in  the  signature  of  the  drawers,  who,  in  this 
case,  we  will  presume,  are  responsible  and  of  good 
financial  standing. 

It  must  not  be  supposed,  however,  that  in  every 
case  a  draft  is  made  more  desirable  or  that  its 
value  is  increased  by  attaching  to  it  documents  is- 
sued against  a  shipment  of  merchandise,  for  in 
some  cases  the  drawers  are  of  such  good  standing 
financially  and  morally  that  the  documents  cannot 
add  to  the  market  value  of  their  bill  of  exchange. 
On  the  other  hand,  however,  conservative  bankers 
will  hesitate  before  buying  the  exchange  of  some 
shippers  even  with  the  documents  attached;  but,  as 
a  rule,  if  the  record  of  the  drawer  is  clear  in  every 


COMMERCIAL  EXCHANGE  DRAFTS.  27 

respect  and  his  credit  fairly  good  the  documents 
will  be  considered  sufficient  security. 

We  are  assuming  that  no  difficulty  is  experienced 
in  the  case  we  are  now  considering,  and  that  the 
draft  has  been  bought  and  paid  for  in  United  States 
money.  We  will  assume  still  further  that  it  has 
been  sold  to  a  bank  in  a  small  town  in  Minnesota, 
which,  having  no  direct  correspondent  in  London, 
does  its  foreign  exchange  business  through  a  bank 
in  Chicago.  The  country  banker  will  then  endorse 
the  draft  in  blank  or  payable  to  his  Chicago  corres- 
pondent, and  forward  it  with  the  documents  attach- 
ed to  be  credited  to  his  account  at  the  current  rate 
or  at  a  rate  previously  agreed  upon.  It  will  be  seen 
that  the  country  banker  has  now  become  the  en 
dorser  and  that  the  purchasing  bank  can  hold  him 
for  final  payment  if  for  any  reason  the  draft  has 
been  refused  acceptance  or  payment  by  the  drawee. 

The  property  covered  by  the  draft  has  now  be- 
come for  the  time  being  the  property  of  the  Chicago 
banker,  and  every  detail  of  the  draft  itself  as  well 
as  of  the  shipment,  insurance,  etc.,  is  entered  on  his 
books  for  future  reference.  Both  the  first  and 
second  of  exchange  are  endorsed  to  the  order  of  his 
agents  in  London;  the  original  set  of  documents  is 
attached  to  the  first  of  exchange  and  sent  forward 
for  acceptance  and  collection  in  the  ordinary  course 
of  mail ;  the  duplicate  documents  with  the  second  of 
exchange  go  forward  with  the  next  steamer. 

In  due  time  the  originals  arrive  in  London  and 
are  presented  to  the  drawee,  who,  it  will  be  remem- 
bered, is  also  a  banker.  If  upon  examining  the 
draft  and  documents  he  finds  that  the  particulars 
tally  with  the  terms  of  the  credit  opened  in  favor  of 


28  FOREIGN  EXCHANGE. 

the  drawers  for  account  of  the  flour  dealer  in  Ger- 
many, he  will  have  no  hesitation  in  accepting  the 
draft  in  exchange  for  the  accompanying  documents. 
Tt  will  be  readily  seen  that  to  deliver  the  documents 
before  the  draft  is  paid  would  release  the  only  secu- 
rity the  shippers  had,  as  the  goods  would  be  deliv- 
ered by  the  carrier  upon  production  of  the  bill  of 
lading.  On  the  other  hand,  the  drawee  being  a 
banker  and  presumably  of  high  financial  standing, 
acceptance  by  him  would  be  ample  security  for  pay- 
ment at  maturity,  and  the  London  correspondents 
of  the  Chicago  banker  would  consider  themselves 
justified  in  delivering  the  documents  in  exchange 
for  his  acceptance. 

It  is  customary,  however,  to  accompany  the  draft 
with  definite  instructions  as  to  whether  the  docu- 
ments are  to  be  held  for  payment  or  are  to  be  deliv- 
ered to  the  drawee  against  his  acceptance,  as  for 
example: — ^D.  A.  Documents  for  acceptance.  D.  P. 
Documents  for  payment.  D.  D.  Documents  for  de- 
livery. 

"Documents  for  delivery"  means  that  the  docu- 
ments are  to  be  delivered  to  the  drawee  before  pre- 
sentation of  the  draft  for  acceptance,  to  enable  him 
to  get  possession  of  the  goods  in  order  to  sell  them 
for  account  of  the  drawer  or  simply  to  inspect  them 
and  ascertain  if  they  are  according  to  contract. 

The  drawee  having  accepted  the  draft  in  ex- 
change for  the  documents  has  now  become  the  ac- 
ceptor, and  is  as  liable  for  payment  of  the  draft  at 
maturity  as  if  he  had  given  his  signature  to  a  pro- 
missory note.  In  a  way,  the  fact  that  the  draft  has 
been  accepted  by  the  drawee  releases  all  the  endors- 
ers, but,  should  the  unexpected  happen  and  the  ac- 


COMMERCIAL  EXCHANGE   DRAFTS.  29 

ceptor  go  into  bankruptcy  before  the  draft  matures, 
the  endorsers  would  be  liable  in  case  of  non-pay- 
ment. It  is  necessary,  therefore,  that  the  greatest 
caution  be  used  in  the  delivery  of  the  documents. 

In  accordance  with  the  terms  of  the  credit  the 
acceptor  must  either  forward  the  documents  to  the 
custom  house  brokers  of  the  consignee  of  the  goods, 
or  remit  them  direct  to  the  consignee's  banker.  In 
the  former  case  the  custom  house  brokers  look 
after  the  shipment  upon  its  arrival,  and  send  it  on 
to  its  destination  after  the  proper  entries  have  been 
made  at  the  custom  house. 

The  documentary  draft  has  now  become  a  ^^clean 
bill,"  and  the  correspondents  of  the  Chicago  banker 
discount  it  for  the  latter's  credit.  Its  payment  at 
maturity  being  practically  assured,  the  discount  at 
the  current  rate  for  the  time  the  draft  has  to  run  is 
deducted  from  the  amount,  and  the  remainder  is 
placed  to  the  credit  of  the  Chicago  banker,  thus  es- 
tablishing a  credit  in  his  favor  against  which  he 
may  draw  on  demand. 

In  the  meantime  the  German  banker  is  advised 
by  his  London  correspondents  that  they  have  ac- 
cepted a  draft  for  a  certain  amount  under  the  letter 
of  credit  opened  in  favor  of  the  Minnesota  Com- 
pany. This  information  is  at  once  communicated  to 
the  flour  dealer,  who,  if  his  banker  demands  it,  gives 
a  trust  receipt  for  the  goods  in  exchange  for  the 
documents  which  were  forwarded  to  his  custom 
house  brokers  or  to  his  bankers  direct.  When  the 
draft  falls  due  in  London  and  is  paid  by  the  acceptor 
the  amount  is  charged  to  the  account  of  the  German 
banker,  and  he  in  turn  converts  the  sterling  amount 
into  marks  at  the  current  rate  of  exchange  for  the 


80  FOREIGN  EXCHANGE. 

f 

day,  and  collects  the  proceeds  from  the  dealer  in 

flour;  with  this  the  liability  of  the  endorsers  ceases 

and  the  transaction  is  complete. 

Now  the  question  of  profit  comes  up.  It  will  be 
observed  that  directly  or  indirectly  the  draft  has 
been  handled  by  seven  different  parties  without 
taking  into  consideration  the  fact  that  it  may  have 
been  bought  and  sold  any  number  of  times  in  Lon- 
don before  it  was  finally  paid  up  by  the  acceptors. 
Each  one  of  these  seven  parties  must  have  received 
a  fair  remuneration  for  his  trouble,  and  it  is  evi- 
dent in  the  first  place  that  the  shippers  have  made 
their  profit  on  the  sale  of  their  goods. 

The  profit  of  the  Minnesota  banker  is  the  differ- 
ence between  the  amount  he  paid  the  shippers  for 
their  draft  and  the  amount  he  received  from  the 
Chicago  banker  for  same.  The  Chicago  banker 
makes  his  profit  in  the  difference  between  the  price 
he  has  paid  for  the  draft  and  the  price  at  which  he 
has  sold  his  own  draft  against  it,  less  the  commis- 
sion he  has  to  pay  his  London  correspondent  for 
taking  charge  of  the  collection  and  for  paying  his 
draft;  and  this  commission  forms  the  profit  that 
the  London  banker  makes  out  of  the  transaction. 

Now  the  acceptor  of  the  draft  must  receive  some- 
thing to  compensate  him  for  his  trouble  and  for  the 
liability  incurred,  and  this  he  receives  from  the  Ger- 
man banker  by  charging  the  latter's  account  with  a 
small  commission  in  proportion  to  the  length  of 
time  he  has  been  under  acceptance  for  the  amount 
of  the  draft.  The  German  banker  derives  his  profit 
from  a  commission  charged  the  flour  dealer,  and 
the  flour  dealer,  in  his  turn,  makes  his  profit  in  the 
sale  of  the  goods  to  his  customers. 


COMMERCIAL  EXCHANGE  DRAFTS.  31 

Direct  transactions  between  manufacturers  and 
jobbers  or  between  manufacturers  and  merchants 
of  different  countries,  differ  from  the  method  em- 
ployed where  a  banker's  credit  is  opened  to  cover 
the  transaction,in  that  the  documents  in  the  major- 
ity of  cases  are  to  be  delivered  to  the  drawee  only 
upon  payment  of  the  draft,  and  in  that  the  jobber, 
himself  being  the  drawee,  has  to  accept  the  draft 
and  account  for  the  proceeds  at  maturity  to  the 
London  correspondent  of  the  American  banker.  If 
he  can  use  his  funds  to  better  advantage  than  by 
paying  the  draft  on  presentation  and  thereby  ob- 
taining a  rebate  on  the  amount,  he  will  of  course  do 
so ;  but  if  the  goods  are  perishable,  as  in  the  case  of 
meat,  butter,  cheese,  etc.,  or,  if  there  is  a  good  de- 
mand for  them  and  the  price  has  advanced  since  the 
order  was  placed,  it  will  clearly  be  to  his  advantage 
to  pay  the  draft  at  once  and  obtain  possession  of 
the  documents  and  ultimately  of  the  goods. 


CHAPTER  V. 

PROFITS  OP  FOREIGN  EXCHANGE  BUSINESS— -THE 
MARGIN  NARROW  IN  CITIES  BUT  LARGER  AT 
INTERIOR  POINTS— SUGGESTIONS  FOR  THE  EM- 
PLOYMENT OF  COUNTRY  BALANCES— THE 
SOUTH  AMERICAN  FIELD  OPEN  FOR  EXCHANGE 
OPERATIONS. 

Though  the  profits  of  the  foreign  exchange  busi- 
ness, when  single  transactions  are  considered,  may 
appear  ridiculously  small,  they  amount  to  a  very 
considerable  sum  in  the  aggregate  at  the  large  cen- 
tres, and  in  an  active  business  season  transactions 
in  as  much  as  £500,000  per  day  are  very  often  re- 
corded. Until  within  a  few  years  quotations  for 
actual  business  in  sterling  exchange  fluctuated  ordi- 
narily by  quarters  of  a  cent  per  pound,  as  for  ex- 
ample |4.85:|  to  14.85^.  As  competition  grew  more 
keen  and  the  business  expanded,  closer  quotations 
were  made,  and  now  decimals,  instead  of  fractions, 
are  employed  to  express  prices,  such  as  $4.85.35  or 
14.8540,  so  that  whereas  formerly  a  minimum  profit 
of  25-100  of  a  cent  per  pound  might  be  made,  the 
profit  is  sometimes  as  small  as  5-100  of  a  cent  per 
pound.  Of  course,  it  would  be  only  in  cases  where 
transactions  were  large  that  a  comparatively  insig- 
nificant profit  such  as  the  above  would  be  consider- 
ed and  smaller  transactions  would  not  be  made  on 


PROFITS  OF  FOREIGN  EXCHANGE  BtJSINESS.    33 

SO  close  a  margin.  But  on  an  average  sale  of  £500 
a  net  profit  of  25  cents  would  not  be  refused,  and  on 
a  business  of  £500,000  per  day,  which  is  not  infre- 
quent, with  leading  foreign  exchange  houses  in  New 
York,  the  profits  would  be  quite  satisfactory, 
amounting  to  |250. 

In  this  connection  it  may  be  stated  that  within 
the  past  three  years  a  business  in  foreign  exchange 
has  been  built  up  by  one  of  the  large  banks  of  New 
York,  from  comparatively  small  beginnings,through 
economical  management  and  the  acceptance  of  pro- 
fits as  little  as  the  lowest  above  referred  to,  until 
now  the  foreign  exchange  department  of  this  bank 
is  one  of  the  most  important  at  this  centre.  Its  rev- 
enues are  so  large  in  the  aggregate  as  to  defray 
the  entire  cost  of  the  department,  including  a  high 
rental  for  the  oifices,  and  add  a  handsome  quarterly 
contribution  to  the  net  profits  of  the  bank.  This  is 
an  illustration  of  the  possibilities  of  the  foreign 
exchange  business  when  intelligently  conducted  in 
an  active  centre  such  as  New  York.  Other  New 
York  banks  which  have  established  foreign  ex- 
change departments  within  a  few  years  have  had  a 
similar  experience,  enjoying  a  steadily  increasing 
business  and  necessitating  the  enlargement  of  their 
facilities  and  of  their  list  of  correspondents. 

It  may  be  observed  that  it  is  only  at  the  great 
financial  centres  of  the  country,  where  the  competi- 
tion is  most  active,  that  the  profits  of  single  trans- 
actions in  exchange  are  so  small.  In  the  country 
outside  the  centres  a  profit  of  at  least  half  a  cent 
per  pound  sterling  can  be  secured,  and  where  francs, 
marks  or  other  continental  exchange  are  more  or 
less  in  demand,  even  a  larger  profit  is  obtainable. 


34  FOREIGN  EXCHANGE. 

By  combining  with  foreign  exchange  operations  in 
inland  bills  of  exchange  and  by  making  advances  to 
shippers  of  exportable  products,  and  through  vari- 
ous other  ways  which  will  suggest  themselves  to 
progressive  bankers,  an  exchange  business  can  be 
built  up  by  banks  in  the  agricultural  regions  and  in 
those  sections  of  the  country  which  are  being  set- 
tled by  European  immigrants,  which  business  in 
time,  and  with  care,  can  be  made  highly  profitable. 

One  important  reason  why  commercial  bills  of 
exchange  which  originate  in  the  agricultural  re- 
gions are  not  more  generally  sold  at  neighboring 
centres,  but  are  forwarded  to  large  western  cities 
and  to  New  York  for  sale  is  that  the  drawers  of 
these  bills  can  obtain  a  better  price  for  them  at  Chi- 
cago and  at  this  city  than  they  can  elsewhere. 
Another  reason  is  that  the  capital  of  inland  banks 
is  as  a  rule  not  large  enough  successfully  to  conduct 
this  business  in  addition  to  ordinary  transactions; 
and  still  another  reason  is  that  very  many  of  the 
country  bankers  are  unfamiliar  with  modern  meth- 
ods of  handling  exchange  operations. 

At  certain  seasons  of  the  year,  when  the  crops 
are  moving,  money  is  drawn  to  the  agricultural  re- 
gions from  the  great  centres,  and  when  this  crop 
movement  subsides  the  money  is  returned  to  such 
centres.  The  movement  of  money  is  attended  with 
much  expense  to  the  banks,  and  sometimes  the  want 
of  it  during  periods  of  unusual  activity  results  in 
considerable  inconvenience.  When  country  bank 
balances  cannot  be  employed  by  reason  of  dull  busi- 
ness seasons  the  money  is  sent  to  the  bank's  cor- 
respondent in  Chicago  or  New  York,  and  there  com- 
paratively insignificant  rates  of  interest  are  paid, 


PROFITS  OP  FOREIGN  EXCHANGE  BUSINESS.     35 

rarely  exceeding  2J  per  cent,  per  annum,  and  in 
some  cases  much  less.  If  the  banks  in  those  sec- 
tions would  make  arrangements  to  supply  the  needs 
of  exporters  of  the  products  through  the  negotia- 
tion of  the  foreign  bills  of  exchange  resulting  from 
such  exports,  they  would  not  only  derive  pecuniary 
advantage  therefrom,  but  they  would  have  active 
employment  for  their  money  during  the  greater 
part  of  the  year,  in  assisting  in  the  movement  for 
gathering  and  in  the  export  distribution  of  the 
crops,  instead  of  sending  it  to  the  great  centres  for 
temporary  use.  Moreover,  by  endeavoring  to  build 
up  a  foreign  exchange  business  they  might  be  en- 
couraged to  increase  their  capital  and  to  augment 
their  circulation  and  other  facilities,  and  ere  long 
they  would  doubtless  discover  that  they  were  grow- 
ing less  dependent  upon  the  banks  at  the  large  cen- 
tres, and  at  the  same  time  that  their  sections  were 
increasing  in  financial  importance.  Through  the 
more  general  employment  of  money  there  would  be 
less  disturbance  of  equilibrium,  which  would  result 
in  more  stable  rates  for  money — an  advantage  to 
all  interests. 

The  coincidence  of  the  assembling  of  the  New 
York  State  Bankers'  Association  in  annual  session 
during  the  Pan-American  Exposition  at  Buffalo  in 
1901,  gave  the  bankers  of  the  state  an  opportunity 
to  combine  business  with  pleasure,  and  some  of  the 
more  progressive  of  the  bankers  may  have  seen 
opportunities  for  the  organization  of  exchange  de- 
partments with  a  view  to  the  transaction  of  an  ex- 
change business  with  South  American  states.  Such 
transactions  are  now  conducted  through  agencies 
in  New  York  of  BritisU  b^nks,  and  while  a  direct 


1^' 


S6  FOREIGN  EXCHANGE. 

exchange  is  thus  effected,  the  profits  of  the  trans- 
.actions  are  largely  enjoyed  by  foreign  institutions. 
It  may  not  be  possible  for  American  banks  success- 
fully to  compete  at  once  with  these  long-established 
branches  of  British  concerns,  but  representatives 
of  South  American  countries  who  were  in  attend- 
ance upon  the  Exposition  doubtless  would  be  able, 
if  requested,  to  suggest  to  American  bankers  a  way 
by  which  at  least  a  beginning  might  be  made  in  this 
business,  which  would  ere  long  have  satisfactory 
results.  This  new  branch  of  banking  need  not 
necessarily  be  confined  to  banks  in  New  York;  it 
would  seem  to  be  open  to  institutions  located  in 
large  manufacturing  centres  whence  machinery  is 
shipped  to  South  America.  Now  these  consignments 
are  settled  for  through  exchange  drawn  on  London. 
If  American  banking  houses  could  be  induced  to 
open  exchange  departments  for  South  American 
trade  the  drawing  of  exchange  in  dollars  would 
doubtless  be  most  satisfactory.  While  the  organi- 
zation of  a  central  bank  for  this  purpose  may  be  de- 
layed, there  would  seem  to  be  no  reason  why  some 
of  the  already  existing  banking  institutions  should 
not  make  an  effort  to  establish  financial  links  in  the 
form  of  direct  exchange  operations  between  the 
United  States  and  Central  and  South  America.  Our 
South  American  commerce  is  rapidly  expanding.  It 
will  be  given  a  very  decided  impetus  by  the  Exposi- 
tion, and  with  the  friendly  relations  which  will  thus 
be  cemented  the  opportunity  would  seem  to  be  pre- 
sented for  the  gathering  by  ourselves  of  the  finan- 
cial fruits  of  our  commercial  enterprise  by  direct 
exchange  negotiations  instead  of  through  branches 
of  foreign  exchange  houses. 


CHAPTER  VI. 

ERRONEOUS  FORECASTS  OF  EXCHANGE  CONDI- 
TIONS—EFFECT UPON  THE  MARKET  OF  THE 
FAILURE  OF  THE  CORN  CROP  IN  1901— DERANGE- 
MENT RESULTING  FROM  OVERSOLD  COMMER- 
CIAL BILLS. 

In  conducting  speculative  operations  in  foreign 
exchange,  operators  sometimes  miscalculate  the 
effect  upon  the  market  of  possible  adverse  condi- 
tions, or  of  the  development  of  opposition  on  the 
part  of  some  of  the  large  banking  houses  which 
conditions  and  opposition  may  be  of  such  a  charac- 
ter as  could  not  have  been  clearly  foreseen  when 
the  speculative  operations  were  undertaken.  For 
example,  in  May,  1901,  the  indications  seemed  to 
point  to  such  an  abundant  yield  of  wheat  and  to 
such  a  large  crop  of  corn  and,  at  the  same  time,  to 
an  important  reduction  in  the  output  of  breadstuffs 
in  Europe,  as  to  make  it  almost  certain  that  there 
would  be  an  unusually  large  export  movement  of 
our  cereals,  especially  to  Germany. 

Acting  upon  this  conviction,  speculators  in  grain 
contracted  for  the  delivery  in  July  of  considerable 
amounts  of  wheat  for  shipment  abroad,  and  almost 
concurrently  these  speculators,  or  those  dealers  in 
exchange  who  were  co-operating  with  them,  sold 
correspondingly  large  amounts  of  commercial  bills 
deliverable  in  July  and  in  later  months,  which  bills 
were  drawn  against  the  prospective  movement  of 
the  grain  to  Europe.    These  were  legitimate  specu- 


38  FOREIGN  EXCHANGE. 

lative  operations,  not  only  in  grain  but  in  exchange, 
based  upon  what  then  seemed  to  be  a  certainty  of 
greater  or  less  profit.  Such  transactions  continued 
to  be  almost  uninterruptedly  made  during  June  and 
somewhat  intermittently  in  July.  In  the  more  re- 
cent months  there  were  also  speculative  operations 
in  sixty  and  ninety-day  sterling  in  anticipation  of 
covering  the  sales  of  these  bills  at  a  profit  in  Octo- 
ber and  November,  when  it  was  reasonably  expected 
that  there  would  be  an  abundant  supply  of  ex- 
change resulting  from  the  export  movement  of 
breadstuffs  and  of  cotton. 

Until  the  drouth  in  the  corn-growing  states  be- 
came so  severe  as  to  threaten  a  very  decided  reduc- 
tion in  the  yield  of  that  cereal,  there  was  nothing 
in  the  outlook  to  disturb  the  confidence  of  the  sell- 
ers of  grain  or  of  exchange  for  future  delivery  in 
the  success  of  their  operations.  Discounts  at  almost 
all  the  European  centres  grew  easier,  while  at  home 
the  tendency  was  toward  firm  rates  for  money,  thus 
favoring  speculative  transactions  in  exchange  and 
increasing  the  prospects  for  profits. 

Influenced  by  the  return  movement  of  securities 
from  Europe,  which  followed  the  shock  of  the 
May  panic,  incident  to  the  Northern  Pacific  corner, 
the  foreign  exchange  market  was  firm,  thus  aiding 
in  the  absorption  of  the  speculative  bills  at  high 
prices.  Indeed,  rarely  had  there  been  such  favor- 
able conditions  for  speculation  in  exchange,  of  the 
character  above  indicated,  as  those  which  were 
developed  in  May  and  June.  The  drouth  in  the  corn 
belt  in  July,  however,  accompanied  as  it  was  by  a 
prolonged  period  of  extreme  heat,  was  a  highly  dis- 
turbing factor  in  the  market  for  grain,  causing  an 


ERRONEOUS  FORECASTS  OF  EXCHANGE.  39 

important  advance  not  only  in  the  price  of  corn  but 
in  that  for  wheat,  and  it  began  to  be  feared  that 
these  high  prices  would  seriously  check  at  least  the 
early  movement  of  these  cereals  for  export,  and 
that  consequently  deliveries  of  such  commodities 
which  had  been  contracted  for  could  not  be  made 
and  hence  that  the  resulting  exchange  could  not  be 
delivered.  Some  apprehension  was  also  felt  that 
if  the  crop  of  corn  should  prove  to  be  so  greatly  re- 
duced in  volume  as  then  appeared  probable,  the 
effect  upon  foreign  exchange  would  be  to  prevent 
any  material  decline  in  the  rates  at  least  until  cot- 
ton began  freely  to  move.  As  the  normal  export  of 
corn  in  recent  years  had  been  of  the  value  of  about 
$83,000,000,  it  was  seen  that  the  shortage  in  the  crop 
would  make  a  corresponding  reduction  in  exports, 
and  hence  there  would  be  a  serious  decrease  in  the 
volume  of  exchange  drafts.  Moreover  though  the 
wheat  crop  promised  to  be  greatly  abundant,  and 
of  unprecedented  yield  in  some  of  the  states,  there 
were  fears  that  the  advance  in  the  price  of  this 
staple,  which  followed  that  of  corn,  would  deter 
liberal  exports  of  wheat  and  of  flour,  even  though 
the  European  demand  might  be  urgent,  and  that 
foreign  consumers  of  wheat  would  seek  to  procure 
substitutes  therefor,  or  would  buy  the  grain  in 
somewhat  cheaper  though  more  distant  markets 
abroad.  This  threatened  reduction  in  the  exports 
of  corn  and  of  wheat  and  flour,  which  exports  in  the 
fiscal  year  1900-1  amounted  in  value  altogether  to 
nearly  |250,000,000,  became  a  seriously  deranging 
factor  in  the  exchange  market,  and  especially  so 
when  the  fact  was  considered  that  the  early  specu- 
lative operations  in  exchange  were  based,  when 


40  FOREIGN  EXCHANGE. 

made,  upon  the  prospects  of  a  liberal  movement  of 
breadstuffs  before  that  of  cotton  began. 

In  addition  to  the  adverse  influences  upon  specu- 
lative contracts  in  exchange  above  noted,  some  of 
the  foreign  bankers,  who  deal  largely  in  such  drafts, 
possibly  with  the  view  of  discouraging  such  trans- 
actions, because  they  had  become  so  important  as 
somewhat  to  interfere  with  their  own  operations, 
sought  to  discriminate  against  commercial  futures 
drawn  in  anticipation  of  prospective  shipments  of 
grain,  especially  to  Germany,  thus  compelling  the 
drawers  of  such  bills  to  accept  a  lower  price  for 
them  than  seemed  to  be  reasonable  under  the  cir- 
cumstances. These  bankers  also  in  various  other 
ways,  such  as  the  absorption  of  bills  for  remittance 
and  for  other  purposes,  kept  the  market  during  July 
in  such  a  comparatively  tense  condition  as  to  cause 
speculative  sellers  of  sixty-day  exchange  who  had 
operated  in  May,  to  rebuy  the  bills  for  covering  or 
for  renewal,  thus  further  deranging  the  early  made 
plans  of  these  speculators.  In  some  cases  also  the 
firmness  of  the  market  for  exchange,  which,  as  will 
be  observed,  was  to  a  great  extent  artificial,  in- 
duced sellers  of  commercial  bills  in  May  for  deliv- 
ery in  July  to  cover  their  contracts  either  at  a 
smaller  profit  than  was  expected  or  at  a  loss. 

We  have  thus  outlined  the  conditions  due  to  un- 
preventable  and  also  to  artificial  causes,  which 
were  operating  in  1891,  for  the  purpose  of  illus- 
trating the  obstacles  which  sometimes  naturally 
arise  or  are  interposed  to  make  comparatively  un- 
successful those  of  the  most  simple  forms  of  specu- 
lation in  exchange  such  as  are  capable  of  being 
undertaken  by  country  bankers. 


I 


CHAPTER  VII. 

THE  STUDY  OP  THE  SCIENCE  OF  EXCHANGE- 
PAUCITY  OP  TEXT  BOOKS— GENERAL  USE  OP 
EXCHANGE  TABLES— NORMAN'S  SYSTEM  OP 
CALCULATIONS— HOW  PIXED  PARS  OP  EX- 
CHANGE ARE  COMPUTED  IN  HIS  CAMBIST. 

Doubtless  many  who  have  been  interested  in  the 
science  of  exchange,  have  felt  disappointment  at 
finding,  upon  inquiry,  how  few  valuable  text 
books  treating  of  this  science  were  obtainable.  The 
few  publications  which  exist  are  mostly  of  such  a 
character  as  to  require  more  or  less  close  study  for 
their  comprehension.  While  the  theory  of  foreign 
exchange  is  quite  clearly  defined,  the  rules  for  prac- 
tice are  not  always  illustrated  by  formulas.  More- 
over, in  seeking  for  explanations  from  Cambists  of 
how  or  through  what  mathematical  process  certain 
results  were  obtained,  the  reply  has  often  been 
unsatisfactory,  either  because  of  inability  to  impart 
instruction  or  because  of  indisposition  to  inform 
those  who  may  possibly  become  business  rivals. 

It  may  seem  somewhat  strange  that  anyone  who 
can  be  classed  as  a  Cambist,  or  who  is  actively  en- 
gaged in  the  conduct  of  more  or  less  intricate  ex- 
change operations,  should  be  unable  accurately  and 
clearly  to  explain  the  processes  through  which  cer- 
tain results  are  obtained.    When  the  fact  is  con- 


42  FOREIGN  EXCHANGE. 

sidered,  however,  that  exchange  is  almost  invari- 
ably worked  out  by  the  aid  of  tables,  it  will  be  seen 
that  this  inability  is  not  surprising.  The  tables 
are  constructed  for  general  use  by  expert  mathema- 
ticians who  are  familiar  with  every  essential  detail, 
the  calculations  are  for  almost  all  amounts  which 
may  be  called  for  in  the  course  of  daily  business; 
they  are  for  all  ordinary  time-costs  and  other 
charges,  and  for  all  practical  purposes  they  will 
meet  every  requirement.  Provided  with  these 
tables,  the  active  dealer  in  exchange  can  readily 
conduct  his  business  in  all  forms  of  bills  and  in  all 
kinds  of  money,  whether  gold,  silver  or  paper  cur- 
rency, and  can  easily  determine  the  rates  for  drafts, 
whether  direct  or  circuitous,  upon  any  commercial 
centre  of  the  world.  In  some  cases  foreign  bankers 
wio  transact  a  large  business  have  their  calcula- 
tions especially  prepared  for  them,  and  thus  they 
are  not  wholly  dependent  upon  the  above-noted 
tables.  These  bankers  are,  through  chief  reliance 
upon  their  own  tables,  often  enabled  to  make  more 
profitable  operations  than  their  competitors  who 
are  unprovided  with  such  exact  computations.  Re- 
sults obtained  through  even  the  most  accurate  of 
these  tables  may,  however,  be  regarded  as  more 
mechanical  than  scientific  solutions,  and  hence 
those  who  rely  wholly  upon  them  gradually  become 
unable  through  lack  of  practice  clearly  to  illustrate 
the  details  of  exchange  transactions.  Bankers  who 
propose  simply  to  confine  their  operations  to  occa- 
sional dealings  in  exchange  drafts  will  doubtless 
find  that  these  tables  of  solutions  which  are  pre- 
pared for  general  use  are  amply  sufllcient  for  their 
purposes. 


THE  STUDY  OF  THIE  SCIENCE  OF  EXCHANGE.       43 

Students,  however,  who  desire  to  acquire  a  thor- 
ough knowledge  of  the  science  of  foreign  exchange 
and  thus  obtain  a  reputation  as  Cambists,  would  do 
well  to  procure  the  most  reliable  text  books,  and 
with  their  aid  work  out  for  themselves  the  various 
problems,  and  verify  by  actual  computation  the  re- 
sults given  in  the  tables  above  referred  to.  This 
practice  will  be  found  useful  when  the  student 
comes  to  the  investigation  of  modernly-devised  pro- 
cesses for  simplifying  exchange  calculations  upon 
what  is  claimed  to  be  a  scientific  basis. 

Among  the  most  useful  of  the  works  on  foreign 
exchange  will  be  found  ^^Norman's  Universal  Cam- 
bist," by  elohn  H.  Norman,  who  is  recognized  as  an 
expert  in  the  science  of  and  practice  with  money. 
The  second  edition  of  this  work,  published  in  Lon- 
don in  1897,  is  claimed  on  the  title  page  to  be  "a 
ready  reckoner  of  the  world's  foreign  and  colonial 
exchanges  of  seven  monetary  and  currency  interme- 
diaries with  the  aid  of  less  than  60,000  figures 
whereby  756  tables  of  exchange,  consisting  of  from 
13,800  to  200,000  figures  each,  can  be  dispensed 
with."  Such  a  simplification  of  calculations  of  ex- 
change, could  it  be  universally  adopted,  as  it  was 
sought  to  be  by  the  author,  would  doubtless  prove 
a  valuable  aid  to  the  scientific  study  of  foreign  ex- 
change. It  should  be  noted,  however,  that  though 
Norman's  system  of  working  the  exchanges  of  small 
or  large  sums  by  the  weights  of  pure  metal  in  the 
world's  moneys  of  account  is  admitted  by  good 
authorities  to  be  the  only  scientific  one,  it  was  tried 
and  abandoned  after  eight  days'  experience  in  this 
city  about  sixteen  years  ago,  because  it  did  not 
commend  itself  to  those  most  largely  interested  in 


44  FOREIGN  EXCHANGE. 

the  matter.  This  fact  would  seem  to  prove  that 
large  dealers  in  exchange  preferred  to  adhere  to  the 
old  system  of  working  with  exchange  tables,  con- 
structed upon  an  unscientific  basis,  instead  of 
adopting  a  new  system  which  would  give  more  accu- 
rate results  through  less  complicated  methods  of 
y  calculation. 
^  We  submit  a  few  extracts  from  Norman,  selecting 
those  which  are  of  general  interest  to  the  student, 
and  which  state  the  basis  of  the  revised  system  of 
exchange  calculations.  Treating  of  fixed  pars  of 
exchange,  Norman  gives  an  illustration  the  fact 
that  113,001605  grains  of  pure  gold  are  signified  in 
the  monetary  terms  of  the  British  Isles  as  a  sover- 
eign, this  being  the  mint  issue  weight  of  that  coin; 
in  France  by  25  francs  22.15  centimes;  in  Germany 
by  20  marks  42.96  pfenninge,  and  in  the  United 
States  by  |4.8665  cents.  The  above  weight  of  gold 
in  the  sovereign  being  multiplied  by  2.123863  pence 
per  grain  gives  240  pence,  into  which  the  sovereign 
is  divided.  In  France  the  same  weight  being  multi- 
plied by  22.31964  centimes  per  grain  gives  25  francs 
22.15  centimes.  In  Germany  the  same  weight  multi- 
plied by  18.07893  pfenninge  per  grain  gives  42.96 
pfenninge.  In  the  United  States  the  same  weight 
multiplied  by  4.306632  cents  per  grain  gives  |4.86.65. 
The  results  of  these  calculations  are  termed  the 
fixed  pars  of  exchange  between  Great  Britain, 
France,  Germany  and  the  United  States.  For  finding 
the  fixed  pars  of  exchange  between  Great  Britain 
and  the  countries  mentioned  the  weight  of  pure 
gold  in  their  chief  moneys  of  account  must  be  divid- 
ed by  the  weight  of  the  pure  gold  in  the  sovereign, 
and  the  result  will  be    Pars  with  France,  .039648  of 


THE  STUDY  OP  THE  SCIENCE  OF  EXCHANGE.       45 


. ^ 

.049948  of  a  sovereign,  or  11.747  pence  per  mark,  and 
with  the  United  States,  .205484  of  a  sovereign,  or 
49.314  pence  per  dollar.  It  will  be  observed  that 
the  various  pars  are  calculated  on  the  basis  of  the 
weight  of  the  pure  metal  contained  in  the  chief 
-  moneys  of  account,  and  this  is  claimed  to  be  the  true 
scientific  basis.  Similar  rules  are  applied  by  Nor- 
man to  the  ascertainment  of  fixed  pars  of  exchange 
between  the  gold  and  between  the  silver  monetary 
systems  of  the  world  on  the  mint  issue  weight  of 
pure  silver  in  the  silver  standard  systems.  The 
mode  of  ascertaining  absolute  pars  of  exchange,  or 
the  equivalent  value  of  gold  to  silver  or  silver  to 
gold  upon  the  gold  price  of  silver  in  gold  standard 
countries,  and  the  silver  price  of  gold  in  silver 
standard  countries,  is  made  equally  simple  by  the 
use  of  an  intermediary  in  the  form  of  a  variable 
ratio. 

The  Universal  Cambist,  from  which  we  have 
quoted,  contains  tables  of  fixed  gold  equivalents  to 
gold  in  seventeen,  and  of  fixed  silver  equivalents  to 
silver  and  of  silver  equivalents  to  gold  in  twelve 
countries,  thus  covering  nearly  the  whole  of  the 
commercial  world  and  facilitating  the  working  of 
exchange  calculations. 

Owing  to  the  partiality  for  the  present  method 
of  computation  and  working  manifested  by  the 
great  majority  of  drawers  of  foreign  exchange  it 
seems  unlikely  that  Norman's  system — which  is 
based  upon  constants  or  fixed  pars  for  exchange 
and  the  use  of  premiums  or  discounts  upon  these 
constants — will  soon  be  generally  adopted.  Bank- 
ers who  have  become  familiar,  through  practice  and 


46  FOREIGN  EXCHANGE. 

study,  with  the  existing  methods  of  computation, 
will  not  readily  consent  to  the  substitution  there- 
for of  a  system  which,  though  it  may  be  scientific, 
involves  the  abandonment  of  tables  and  rules  which 
have  grown  to  be  almost  universally  employed. 
Norman's  tables  will,  however,  probably  be  found 
exceedingly  useful  in  cases  where  exact  computa- 
tions of  weights  and  fineness  of  metal  may  be  re- 
quired for  the  adjustment  of  international  balan- 
ces with  gold.  The  system  advocated  by  Norman 
will  also  be  useful  for  the  student  of  exchange  be- 
cause of  its  scientific  character,  and  also  because 
of  the  knowledge  which  will  be  imparted  by  it  re- 
garding the  precise  basis  of  exchange  computations. 
Where  text  books  treating  of  the  science  of  ex- 
change are  so  few,  it  would  seem  unwise  for  the 
student  to  reject  any  of  these  books  upon  the  plea 
that  they  are  unlikely  to  be  of  material  assistance 
to  him  in  the  conduct  of  his  business  though  they 
convey  valuable  scientific  information.  Indeed,  a 
student  of  finance  might  with  equal  propriety  de- 
cline to  study  Bagsehot,  J.  Stuart  Mill,  Herbert 
Spencer  or  other  eminent  authors  of  works  upon 
financial  or  economic  subjects. 


ipol 


CHAPTER  VIII. 

TATE'S  MANUAL  OF  FOREIGN  EXCHANGES— MATHE- 

iMATICAL  COMPUTATIONS  FACILITATED  BY  THE 
ESTABLISHMENT  OF  THE  SINGLE  GOLD  STAND- 
ARD—THE COINAGE  OF  GREAT  BRITAIN. 
Among  the  most  useful  of  the  works  treating  of 
the  science  of  exchange  is  "Tate's  Modern  Cambist," 
the  sixteenth  edition  of  which  was  published  in 
1874.  It  is,  as  is  set  forth  in  the  title  page,  a  "man- 
ual of  foreign  exchanges  in  the  different  operations 
of  exchange  and  bullion  according  to  the  practice 
f  all  trading  nations;  with  the  moneys  and  other 
mediums  of  exchange  of  all  nations  calculated  in 
sterling;  also  tables  of  foreign  weights  and  meas- 
ures, with  their  equivalents  in  English  and  French." 
The  work,  originally  written  by  William  Tate,  was 
issued  in  the  year  above  named  by  G.  L.  M.  Strauss, 
who  re-wrote  and  greatly  enlarged  it.  The  publisher 
is  EflSngham  Wilson,  Royal  Exchange,  London.  The 
character  of  the  work  can  perhaps  best  be  illustra- 
ted by  the  following  extracts  from  the  first  chapter: 
"A  rate  of  exchange  is  the  value  or  price  of  the 
money  of  one  country  reckoned  in  that  of  another 
country.  There  are  accordingly  two  terms  in  a  rate 
of  exchange,  of  which  one  is  fixed,  the  other  fluctu- 
ating. Thus  in  the  exchange  between  London  and 
Paris  the  fixed  term  is  the  pound  sterling,  the  flue- 


4S  FOREIGN  EXCHANGE. 

tuating  term,  the  value  or  price,  given  in  francs 
and  centimes,  in  exchange  for  the  pound  sterling. 
In  the  exchange  between  London  and  Lisbon,  on  the 
.other  hand,  the  milreis  is  the  fixed  term,  whilst  the 
value,  given  in  pence  sterling,  forms  the  fluctuating 
term. 

"When  the  fixed  term  is  expressed  in  the  money 
of  the  country  drawing  the  bill  of  exchange,  the 
drawing  place  is  said  to  receive  the  fluctuating  or 
variable  price;  whilst  in  the  reverse  case,  where 
the  fluctuating  or  variable  term  is  expressed  in  the 
money  of  the  drawing  place  the  latter  is  said  to 
give  the  fluctuating  or  variable  price.  Thus  London 
receives  from  Paris — francs — centimes  for  one 
pound  sterling  and  London  gives  Lisbon — pence  for 
one  milreis.  In  the  quotations  of  rates  of  exchange 
the  fixed  terms  are  often  omitted,  the  variable 
terms  alone  being  called  rates  of  exchange.  The 
exact  equivalent  value  of  the  moneys  or  currencies 
of  different  countries  are  called  Pars  of  Exchange 
between  these  countries. 

"If  all  coins  were  of  the  exact  weight  and  fineness 
laid  down  in  the  mintage  regulations  of  the  differ- 
ent countries,  and  if  there  were  no  such  thing  as 
loss  from  wear  and  tear,  one  of  the  chief  conditions 
indispensable  for  the  correct  deduction  of  Pars  of 
Exchange  would  be  supplied.  As  this  condition  is 
very  rarely  found  to  be  in  actual  existence,  how- 
ever, we  are  compelled  to  base  our  calculations  of 
the  Pars  of  Exchange  between  different  countries 
upon  the  assumption  or  supposition  that  the  several 
currencies  are  really  of  the  exact  weight  and  fine- 
ness fixed  by  their  respective  mints.  This  one  diflft- 
culty  thus  got  over,  another  still  more  serious  ob- 


TATE'S  MANUAL  OF  FOREIGN  EXCHANGES.        49 

stacle  to  mathematical  correctness  in  the  calcula- 
tion of  Pars  of  Exchange  presents  itself,  to  wit,  the 
different  standards  of  value  obtaining  in  the  sev- 
eral countries.  Some  countries  take  gold,  others 
silver,  for  their  standard  of  value.  Of  late  years 
there  has  been  a  tendency  exhibited  on  the  part  of 
some  of  the  most  important  states  of  Europe  and 
America  to  gravitate  toward  the  single  gold  valua- 
tion, or  at  least  to  base  their  standard  of  value 
upon  both  silver  and  gold,  which  certainly  tends  to 
facilitate  matters. 

"Here  in  England  the  single  gold  valuation  has 
prevailed  ever  since  1816.  At  that  time  we  stood 
almost  alone  in  adopting  gold  for  our  standard  of 
value.  Since  then  many  other  countries  have  imi- 
tated our  example,  among  others  the  new  German 
Empire,  quite  recently.  The  United  States  and 
France,  although  still  in  a  measure  retaining  the 
double  standard  of  both  gold  and  silver,  have  taken 
very  serious  steps  toward  the  adoption  of  the  single 
gold  valuation.  The  silver  standard,  however,  con- 
tinues to  retain  its  exclusive  rule  in  Austria,  the 
Netherlands,  the  Scandinavian  countries,  the  Rus- 
sian Empire,  the  East  Indies,  China  and  Japan,  and 
in  Mexico  and  Central  America  and  some  other 
American  states.  In  all  these  countries  gold  is  sim- 
ply an  article  of  commerce,  and  gold  coin  merely 
commercial  money  bearing  a  variable  agio  or  premi- 
um. The  valuation  of  such  gold  coin  amounts, 
under  such  circumstances,  simply  to  a  valuation  in 
bullion  from  which  no  exact  Par  of  Exchange  with 
the  legal  silver  currency  of  the  country  can  properly 
be  deduced.'' 

It  will  be  observed  from  the  above  extract  that 


50  FOREIGN  EXCHANGE.  ! 

the  statement  concerning  the  standard  prevailing 
in  the  United  States,  though  correct  in  1874,  when 
Tate's  Cambist  was  revised,  is  now  erroneous.  Since 
that  year  important  changes  in  the  standard  have 
been  made  by  other  countries.  Holland,  in  1875, 
suspended  the  coinage  of  silver  and  created  the  gold 
florin  as  the  money  of  account.  In  1877  Finland 
replaced  the  double  standard  by  that  of  gold.  In 
1892  Austro-Hungary  replaced  the  silver  standard 
by  that  of  gold.  In  1895  the  gold  standard  was 
adopted  by  Chile;  Kussia,  in  that  year,  prepared  to 
adopt  gold  as  its  standard.  Peru,  in  1900,  provided 
for  a  gold  money  of  account.  In  March  of  that  year 
the  United  States,  having  in  1873  practically  de- 
monetized the  silver  dollar,  and  established  the 
gold  dollar  as  the  unit  of  value,  made  provision  for 
the  permanent  maintenance  of  gold  as  the  stand- 
ard. 

The  establishment  of  the  single  gold  standard  by 
the  principal  commercial  nations  of  the  world,  since 
the  revision  of  Tate's  Cambist,  has  tended  to  facili- 
tate mathematical  correctness  in  the  calculations 
of  Pars  of  Exchange.  Moreover,  the  passage  of  the 
act  of  the  United  States  Congress  in  1900,  which 
provided  for  the  maintenance  of  this  standard,  was 
immediately  reflected  in  the  broadening  of  the  oper- 
ations in  foreign  exchange  between  this  country 
and  the  gold  standard  nations  of  Europe,  and  in 
eliminating  the  obstacles  to  precision  in  computa- 
tions of  exchange,  the  transactions  in  which  now 
amount  to  many  billions  of  dollars  annually.  The 
variableness  in  the  fineness  of  the  gold  coins  of  the 
various  countries  has  been  remedied  in  exchange 
tables,  and  the  provision  for  legal  tolerance  to  cover 


TATE'S  MANUAL  OP  FOREIGN  EXCHANGES.         51 

loss  of  weight  througli  abrasion  practically  makes 
uniform  deductions  of  actual  Pars  of  Exchange. 

The  above  extracts  from  Tate  show  that  it  was 
his  aim,  as  well  as  that  of  the  reviser  of  his  Cambist, 
to  submit  a  work  which  should  be  of  practical  value 
to  students  of  the  science  of  foreign  exchange.  As 
an  aid  to  computations  in  exchange  Tate  gives 
tables  of  weights;  also  the  fineness  of  the  various 
moneys  of  account.  The  Cambist  likewise  contains 
tables  of  linear  measures  and  of  liquid  and  dry 
measures  for  use  in  the  counting  room.  Formulas 
for  conversions  of  different  moneys  of  account  are 
clearly  presented,  these  being  based  upon  the  mint 
value  of  the  coins.  It  may  be  noted  that  Tate,  un- 
like Norman,  did  not  seek  to  teach  a  scientific 
method  of  working  exchange,  the  latter  selecting 
the  pure  gold  in  the  coin  as  the  basis  for  computa- 
tion. Tate  accepted  the  mint  valuation  which  had 
been  the  basis  throughout  almost  the  entire  period 
since  early  in  the  century,  when  Great  Britain 
adopted  gold  as  the  standard  of  value.  Hence  Tate 
will  probably  be  found  more  interesting  to  the  stu- 
dent as  well  as  more  generally  useful  than  Norman. 

We  give  as  an  illustration  of  the  effort  to  correct 

i erroneous  impressions  an  extract  from  a  note  by 
the  reviser  of  Tate  concerning  the  British  coinage 
Qf  gold.  He  says :  "A  great  mistake  has  frequently 
^een  committed,  especially  of  late,  in  supposing 
that  because  gold  is  coined  under  the  superintend- 
ence of  public  officers,  and  that  the  Crown,  with  the 
sanction  of  Parliament,  prescribes  the  standard  and 
current  values,  the  gold  coins  are,  therefore,  issued 
by  the  Government.  This  supposition  is  altogether 
contrary  to  the  fact.   The  Government  coins  no  gold 


52  FOREIGN  EXCHANGE. 

for  itself;  but  like  any  other  private  individual  it 
procures  its  supplies,  when  wanted,  from  the  Bank 
of  England,  which  alone,  for  many  years  past,  has 
been  the  sole  importer  of  gold  into  the  mint.  It  is 
consequently  absurd  to  suppose  that  any  claim  can 
properly  be  made  upon  the  Government  (or  indeed 
upon  the  Bank)  to  reimburse  whatever  loss  arises 
from  the  wear  or  ill-usage  of  this  coin  more  than 
there  could  be  made  upon  any  gratuitous  fabricator 
of  articles  made  of  any  other  material,  to  have  the 
things  wrought  from  it  repaired  or  renovated  after 
they  had  undergone  long  use  and  possibly  unfair 
treatment. 

^'The  nation  chooses  to  have  gold  for  its  standard 
of  value.  The  Bank  purchases  gold  with  its  notes. 
The  Government  works  it  into  coin,  free  of  expense, 
and  the  Bank  issues  this  coin  to  the  public  in  re- 
exchange  for  these  notes  at  a  trifling  advance  of 
rate,  as  a  partial  compensation  for  the  gratuitous 
workmanship;  an  advance  so  trifling,  however,  as  to 
be  barely  sufficient  to  defray  the  expenses  incur- 
red." 


CHAPTER   IX. 
INTERNATIONAL    GOLD    CERTIFICATES— A    DEVICE 
FOR  SUBSTITUTING  FOR  GOLD,  DRAFTS  WHICH 
COULD  BE  AVAILED  OF  BY  TOURISTS— FEASIBIL- 
ITY OF  THE  PLAN. 

A  little  more  than  ten  years  ago  I.  W.  Sylvester, 
an  old  and  A^alued  employe  of  the  Government  in 
the  capacity  of  assayer  in  the  New  York  assay 
office,  conceived  the  idea  of  what  may  be  termed  an 
International  gold  certificate,  based  upon  gold  de- 
posited in  some  central  institution,  such  as  the 
Bank  of  England,  under  conditions,  imposed  by 
International  law,  which  would  protect  the  deposit 
in  the  event  of  war.  Mr.  Sylvester  had,  from  the 
character  of  his  employment,  observed  the  almost 
useless  waste  caused  by  the  movement,  to  and  fro, 
between  this  country  and  European  financial  cen- 
tres, of  gold  in  the  form  of  bars  and  coin,  and  he 
suggested  the  adoption  of  a  certificate  calling  for  a 
certain  number  of  grains  of  standard  gold,  repre- 
senting the  equivalent  of  this  gold  in  dollars, 
francs,  marks  and  sterling  money.  The  form  of  the 
certificate  which  Mr.  Sylvester  prepared  for  the  pur- 
pose of  illustrating  his  system  was  as  follows : 

^^This  certifies  that  on  this  day  there  has  been  de- 
posited at  this  office  one  hundred  and  twenty-nine 
(129)  grains  of  standard  gold.  An  equal  amount  of 
standard  gold  will  be  delivered  to  the  bearer  of  this 


54  FOREIGN  EXCHANGE. 

certificate  on  its  presentation  at  any  of  our  sub- 
Treasury  offices  within  these  United  States. 

"The  bearer  of  this  certificate  may  also  receive  in 
exchange  for  it  20  shillings  and  6  pence  (British  gold 
money)  at  the  offices  of  our  financial  agents,  located 
within  the  Kingdom  of  Great  Britain;  or  25  francs 
and  90  centimes  (French  gold  money)  at  the  offices 
of  our  financial  agents  located  in  either  France, 
Switzerland,  Belgium  or  Italy;  or  21  marks  (Ger- 
man gold  money)  at  the  offices  of  our  financial 
agents  located  within  the  German  Empire,  as  long 
as  these  British,  French  and  German  monies  remain 
of  their  present  weight  and  fineness. 

(Signed)  "Secretary." 

It  was  proposed  that  the  certificates,  which  it 
may  be  noted  represented  the  value  of  |5,  or  its 
equivalent,  should  be  issued  for  units  of  the  various 
monies  named  and  for  divisional  parts  and  for  mul- 
tiplies thereof,  so  that  any  desired  sum  might  be 
paid  with  or  exchanged  for  them  in  any  of  the  prin- 
cipal European  countries.  The  certificates  could  be 
used  by  travelers  independently  of  their  letters  of 
credit;  they  could  be  substituted  for  coins  of  the 
various  countries,  and  even  in  large  transactions 
the  certificates  would  be  as  available  as  the  money 
they  represented.  As  a  medium  for  the  adjustment 
of  international  balances,  certificates  of  larger  de- 
nomination would  be  almost  invaluable,  making 
unnecessary  the  transportation  of  coin  or  bullion, 
and  saving  the  large  sums  which  are  now  almost 
irreparably  lost  through  abrasion  caused  by  trans- 
portation. 

The  plan  of  Mr.  Sylvester  did  not  get  beyond  the 
formative  stage,  though  bankers  and  others  to 


INTERNATIONAL   GOLD   CERTIFICATES.  55 

whom  it  was  submitted  admitted  its  feasibility. 
The  most  important  requisite  would,  of  course,  be 
the  extension  of  facilities  for  the  redemption  of  the 
certificates  at  the  European  centres;  this,  however, 
it  was  thought,  could  be  arranged  with  the  concur- 
rence of  the  respective  Governments  provided  that 
of  the  United  States  took  the  initiative.  Among 
those  who  commended  the  plan  were  closely  observ- 
ing tourists,  who,  suffering  from  the  inconveniences 
attending  the  almost  constant  exchanges  of  money 
in  their  progress  through  European  states,  felt  the 
need  of  some  such  representatives  of  these  monies 
as  would  obviate  the  necessity  of  carrying  or  of 
exchanging  coins.  While  English,  French  and  Ger- 
man bank  notes  circulated  freely  and  at  par  within 
their  respective  countries,  they  were  often  accepted 
only  at  a  discount  when  offered  elsewhere  than  in 
the  country  of  their  origin.  With  the  proposed 
International  certificate,  however,  which  represent- 
ed a  fixed  weight  of  standard  gold,  there  could  be 
little  objection  to  the  acceptance  of  these  certifi- 
cates anywhere  in  the  chief  European  countries. 
Even  this  objection  could,  it  was  suggested,  be 
easily  removed  by  a  provision  which  should  make 
the  representative  of  the  certificate  a  certain  num- 
ber of  grains  of  pure  instead  of  standard  gold — for 
example,  one  hundred  and  sixteen  and  one-tenth 
grains  of  pure  gold,  1,000  fine,  instead  of  one  hun- 
dred and  twenty-nine  grains  of  standard  gold  900 
fine.  This  would  represent  the  same  number  of  five 
dollars  or  their  equivalents  in  British,  French  and 
German  money.  Should  certificates  of  larger  deno- 
mination be  needed,  multiples  of  the  weight  in 
,grain3  could  be  provided. 


56  FOREIGN  EXCHANGE.  ,^ 

Such  a  system  of  certificates  could,  it  seems  quite 
conceivable,  easily  become  the  medium  for  the  ad- 
justment of  all  international  balances  between  gold 
standard  countries,  in  lieu  either  of  exchange  drafts 
or  gold,  thus  providing  the  one  universal  currency 
intermediary  upon  a  scientific  basis,  advocated  by 
Norman  and  other  eminent  Cambists.  It  is  note- 
worthy that  while  Mr.  Sylvester  was  formulating 
his  plan  the  executive  officer  of  one  of  the  New  York 
banks,  who  had  made  a  study  of  the  substitution  of 
silver  bullion  certificates  for  the  metal,  readily 
negotiated  a  foreign  loan  with  a  prominent  bullion 
dealer  in  London,  giving  as  collateral  certificates 
representing  a  precise  weight  of  pure  silver.  The 
success  of  this  transaction  indicated  the  entire  fea- 
sibility of  making  use  of  representatives  of  the 
metal  in  lieu  of  the  metal  itself.  This  negotiation 
seemed  to  suggest  the  employment  of  certificates 
for  silver  bullion  as  an  intermediary  for  the  adjust- 
ment of  balances  between  gold  standard  countries 
and  those  in  the  Orient. 


CHAPTER  X. 

THE  ORIGIN  AND  HISTORY  OF  THE  TROY  POUND- 
GREAT  BRITAIN'S  STANDARD  OP  WEIGHT  FOR 
THREE  AND  THREE-QUARTER  CENTURIES— ITS 
EXISTENCE  FOR  TWO  HUNDRED  AND  SIXTY 
YEARS  WITHOUT  OFFICIAL  RECOGNITION— A 
COPY  OF  THE  STANDARD  IN  USE  IN  OUR  MINTS. 

The  value  or  price  of  the  money  of  account  of 
commercial  countries  is  determined  by  the  weight 
and  fineness  of  the  metal  contained  therein,  which 
weight  and  fineness  are  established  by  the  mint 
laws  of  the  country  issuing  the  money.  It  is  essen- 
tial, therefore,  that  the  standard  of  weight  by 
which  the  various  moneys  of  account  are  establish- 
ed shall  be  unvarying  and  have  the  highest  legal 
sanction.  Otherwise  there  could  be  no  stability  of 
values  and  no  such  thing  as  accurate  deductions  of 
Pars  of  Exchange. 

It  is  noteworthy  that  the  Troy  pound  of  5,760 
grains  has  been  the  standard  of  weight  used  in  the 
mintage  of  the  coins  of  Great  Britain  since  1526,  or 
for  three  and  three-quarter  centuries.  It  will  doubt- 
less be  interesting  to  trace  the  origin  of  this  meas- 
ure of  weight  and  to  note  the  changes  in  it  which 
were  made  from  time  to  time  from  the  earliest 
period  of  its  existence  until  its  final  adoption  as  the 
standard  in  the  year  above  named.    During  the  in- 


58  FOREIGN  EXCHANaE. 

terval  coinage  and  other  operations  based  upon  the 
unoificial  pound  must  have  been  more  or  less  uncer- 
tain, resulting  in  derangements  of  values  and  in- 
ducing the  comparatively  frequent  resort  to  efforts 
to  rectify  the  measure  of  weight. 

Bowling's  history  of  the  Metric  System,  publish- 
ed in  London  in  1872,  says  that  the  origin  of  the 
early  standards  of  weight  and  measure  in  England 
is  extremely  uncertain.  They  were  probably  intro- 
duced from  the  continent,  and  a  portion  of  the 
ancient  measures  and  weights  of  France,  now  dis- 
used in  that  country,  are  still  retained  in  England. 
The  French  pound  sterling  of  Charlemagne  was 
twelve  ounces,  equal  to  565.653  Troy  grains.  He 
introduced  into  France  a  system  of  weights  and 
measures  which  were  based  upon  standards  receiv- 
ed about  807.  Hence  it  is  presumed  that  the  pound 
of  Charlemagne  had  its  origin  in  that  year,  and  that 
the  standards  which  eventually  passed  over  into 
England  from  France  became,  after  modification, 
the  standards  of  Great  Britain. 

Kelly's  Cambist,  published  in  London  in  1821, 
gives  quite  an  interesting  sketch  of  the  origin  of 
the  English  pound,  which  may  have  been  a  modifica- 
tion of  the  pound  of  Charlemagne.  Kelly  says  that 
in  1266  it  was  enacted  that  an  English  penny,  called 
a  sterling,  round  and  without  clipping,  and  there- 
fore a  perfect  coin,  should  weigh  "thirty-two  grains 
of  wheat  taken  from  the  middle  of  the  ear,"  and 
that  twenty  of  these  pennies  should  make  an  ounce 
and  twelve  of  these  ounces  should  make  a  pound.  It 
was  further  enacted  that  "eight  of  these  pounds 
shall  make  a  gallon  of  wine,  and  that  eight  gallons 
of  wine  a  London  bushel,  which  is  the  eighth  part 


ORIGIN  AND  HISTORY  OP  THE  TROY  POUND.       59 

of  a  quarter."  Thus  provision  was  made  in  a  single 
enactment  for  a  standard  of  weight  and  also  stand- 
ards for  liquid  and  dry  measures. 

It  will  be  observed  that  in  the  above  enactment 
the  grains  in  the  measures  of  weight,  both  Troy 
and  avoirdupois,  were  originally  grains  of  wheat, 
these  subsequently  being  changed  to  metallic 
grains,  and  this  designation  of  the  smallest  meas- 
ure of  weight  is  retained  to  this  day.  A  few  years 
later  the  Troy  pound  was  made  the  English  stand- 
ard of  weight  for  precious  metals,  and  in  philosoph- 
ical experiments,  and  instead  of  thirty-two  grains, 
as  originally,  the  number  was  changed  to  twenty- 
four,  these  constituting  the  peunyweight — or  the 
weight  of  a  penny — as  above  noted.  Twenty  penny- 
weights continued  to  make  an  ounce,  and  twelve 
ounces  a  Troy  pound  of  5,760  grains. 

The  proportions  of  the  Troy  pound,  thus  adjusted, 
were  maintained  for  about  two  hundred  and  sixty 
years  without  the  official  recognition  of  this  pound 
as  the  standard  of  weight.  Meanwhile  the  Saxon 
pound  of  5,400  grains,  also  called  the  Moneyer's 
pound,  was  used  by  goldsmiths  and  other  dealers  in 
precious  metals.  In  152G  Henry  the  Eighth  direct- 
ed that  the  Troy  pound  of  5,760  grains  be  substi- 
tuted, and  in  1588  Queen  Elizabeth  caused  a  copy  of 
this  pound  to  be  deposited  at  the  Exchequer  and 
directed  that  it  should  be  the  standard  of  weight. 
It  appears,  therefore,  that  from  1266  to  the  above- 
named  date,  or  for  three  hundred  and  twenty-two 
years,  England  had  no  official  standard  of  weight 
After  the  recognition  of  the  Troy  pound  as  the 
standard  the  copy  was  carefully  preserved.  There 
was,  however,  no  attempt  at  verification  of  the 


60  FOREIGN  EXCHANGE.  i 

standard,  or  copy,  until  1758,  or  one  hundred  and 
seventy  years  after  its  adoption.  Then  the  differ- 
ent parts  of  the  standard  pound  were  tested  by  a 
commission  appointed  by  the  Government,  who 
found  that  the  true  pound  was  one  and  a  half  grains 
heavier  than  the  copy  in  the  Exchequer.  The  neces- 
sary corrections  were  made  and  a  perfect  standard 
was  prepared  and  delivered  to  the  master  of  the 
mint,  by  whom  it  was  preserved.  Since  then  fre- 
quent tests  have  been  made  but  no  change  has  been 
found  necessary,  and  the  Troy  weights  used  in  the 
mint  and  for  precious  metals  are  made  to  conform 
to  this  official  standard. 

A  copy  of  the  standard  Troy  pound  was  procured 
from  England  in  1827  by  the  Minister  of  the  United 
States  to  Great  Britain  for  the  use  of  the  mint,  and 
this  copy  is  in  the  custody  of  the  superintendent  of 
the  mint  in  Philadelphia.  From  this  copy  weights 
in  strict  conformity  therewith,  consisting  of  the 
pound  and  sub-divisions  and  multiples  thereof, 
were  made  for  the  branch  mints  and  assay  offices 
throughout  the  United  States,  under  the  provisions 
of  the  coinage  act  of  1873.  In  pursuance  of  this 
coinage  act  the  copy  of  the  English  pound  was  made 
the  standard  Troy  pound  of  the  mint  of  the  United 
States.  At  the  annual  inspection  of  the  mint  by 
the  commission  appointed  to  test  the  weight  and 
fineness  of  the  gold  and  silver  coins  reserved  for 
examination  the  identical  standard  Troy  pound 
which  was  procured  from  England  is  likewise  in- 
spected, and  the  divisional  and  multiple  parts  there- 
of made  from  this  copy  and  in  use  in  the  mints  are 
compared  therewith  and  certified  to  as  correct.  It 
may  be  noted  that  this  standard  copy  is  of  brass;  it 


ORIGIN  AND  HISTORY  OF  THE  TROY  POUND.       61 

is  kept  in  a  strong  box  locked  with  two  keys,  one  of 
which  remains  with  the  director  of  the  mint  at 
Washington,  and  the  other  is  in  the  custody  of  the 
superintendent  of  the  mint  at  Philadelphia.  The 
smallest  sub-divisions  of  the  standard  weight  in  use 
at  the  mints  and  assay  offices  are  in  hundredths  of 
a  grain;  the  largest  weight  is  twenty-five  pounds. 

It  will  be  observed  from  the  above  that  whatever 
variation  there  may  have  been  in  the  Troy  pound 
previous  to  its  correction  in  1758,  there  has  been  no 
change  in  this  standard  since.  The  periodical  in- 
spections wherever  the  standard  is  in  use  make 
possible  the  discovery  of  any  deterioration.  Hence, 
almost  absolute  reliance  can  be  placed  upon  the 
value  of  bullion  or  of  coins  as  determined  by  the 
standard  Troy  weight,  and  also  upon  the  deductions 
of  the  Pars  of  Exchange  which  are  based  upon  these 
coins. 


CHAPTER  XI. 

THE  METRIC  SYSTEM— EXPERIMENTATION  FOR 
TWO  AND  A  HALF  CENTURIEiS  BEFORE  THE  AT- 
TAINMENT OF  PERFECTION— THE  GRAMME  SUB- 
STITUTED FOR  THE  TROY  GRAIN  IN  MINT  AS- 
SAYS. 

It  appears  by  the  above  sketch  that  until  1588 
the  chief  commercial  nation  of  the  world  was  for 
three  hundred  and  twenty-two  years  without  any 
official  standard  of  weight,  and  hence  that  there 
must  have  been  more  or  less  variableness  in  the 
value  of  the  coins  in  circulation.  There  was  like- 
wise inaccuracy  in  the  minted  values  of  the  coins  of 
France,  owing  to  the  prevalence  in  that  country  of 
systems  of  weights  which  had  their  origin  in  stand- 
ards introduced  into  France  at  the  beginning  of  the 
ninth  century,  and  which  existed  unchanged  until 
the  production  of  the  Charlemagne  pound.  It  would 
seem  that  inaccuracy  of  these  standards  of  weights 
early  attracted  the  attention  of  scientists  in  France, 
and  led  to  efforts  on  their  part  to  devise  a  system  of 
measurements  which  should  have  as  its  basis  a 
fixed  and  unerring  standard. 

Charles  Hutton  Dowling,  an  English  civil  engi- 
neer:, in  1872  published  a  volume  of  tables  of  conver- 
sions of  measures  of  length  and  weight  of  the 
metric  system,  and  in  introducing  his  work  gave  an 


THE  METRIC  SYSTEM.  63 

interesting  sketch  of  the  origin  of  that  system.  He 
notes  the  fact  that  the  earliest  attempt  at  the  de- 
velopment of  the  idea  of  selecting  a  portion  of  the 
earth's  dimensions  as  a  basis  for  uniform  weights 
and  measures  was  conceived  by  Jean  Fernel,  first 
physician  at  the  court  of  Henri  II.,  who  in  1528  indi- 
cated in  a  work  he  published  the  method  of  measur- 
ing for  such  basis  an  arc  of  the  meridian.  He  died, 
however,  before  his  experiments  were  completed. 
The  coincidence  of  the  date  of  those  experiments 
with  that  of  the  official  recognition  by  England  in 
1526  of  the  Troy  pound  as  the  mint  weight  of  Great 
Britain  would  seem  to  indicate  that  FernePs  idea 
had  been  suggested  by  the  adoption  of  the  perfected 
standard  of  weights  by  England.  Fernel  also  pro- 
bably had  in  view  the  discovery  of  a  base  for  the 
French  standard  which  should  be  scientific  and  in- 
variable, which  attributes  were  not  possessed  by 
the  English  standard. 

Seventy-four  years  later,  or  in  1602,  Willebrord 
Snell,  a  geometrician  of  Leyden,  completed  the 
measurement  of  an  arc  of  the  meridian  by  a  system 
of  triangulation,  but  he  did  not  live  to  carry  his 
experiments  further.  An  attempt  to  develop  the 
idea  of  Fernel  was  made  later  in  the  seventeenth 
century  by  Jean  Picard,  professor  of  astronomy  at 
the  College  of  France,  and  by  his  associates,  who 
were  appointed  on  a  commission  by  Louis  XIV. 
They  sought,  however,  to  base  a  new  system  of 
weights  and  measures  upon  the  length  of  the  sec- 
onds pendulum  of  Paris.  Further  progress  in  ex- 
perimentation was  interrupted  by  the  outbreak  of 
war.  In  1669  Calbert  invited  Cassini,  the  cele- 
brated  astronomer,  of  Italy,  to  continue  the  experi- 


64  FOREIGN  EXCHANGEJ. 

ments  which  had  been  begun  by  Picard.  Cassini 
conducted  his  work  until  loss  of  sight  compelled  its 
abandonment,  when  his  son  Jacques  succeeded  in 
carrying  the  experiments  to  a  successful  termina- 
tion. He  took  as  the  unit  of  linear  measurement 
the  sixty-thousandth  part  of  a  terrestrial  degree, 
which  gave  a  length  equal  to  1.85185  of  a  metre.  A 
son  of  Jacques  Cassini  later  brought  the  experi- 
ments to  a  more  exact  determination  through  im- 
proved instruments.  In  1736,  under  orders  from 
Louis  XV.,  experiments  were  prosecuted  by  Lacon- 
damine  in  Peru,  and  by  Maupertius  in  Lapland  to 
execute  geodesic  operations  for  determining  the 
configuration  of  the  earth.  The  length  of  the  toise 
— six  French  feet,  or  about  6.39459  English  feet — 
made  use  of  by  Lacondamine  as  the  basis  for  his 
measurements,  was  declared  in  1766  to  be  the  only 
legal  measure  of  length  in  France.  Thus  after  two 
hundred  and  thirty-eight  years  of  experimental  re- 
search by  the  most  celebrated  scientists  the  stand- 
ard of  linear  measurement  was  established  in  that 
country.  Presumedly  this  standard  was  then  re^ 
garded  as  scientifically  accurate.  It  had  as  a  basis 
absolutely  fixed  data,  determined  through  opera- 
tions with  the  aid  of  the  most  improved  scientific 
instruments,  and  the  result  was  obtained  through 
computations  conducted  with  the  utmost  care.  Com- 
pared with  the  English  standard  of  linear  meas- 
urement, which  had  for  its  unit  the  inch  of  "three 
barley-corns,"  the  French  standard  must  have  been 
regarded  as  perfect. 

In  1791  the  French  Academy  of  Science  recom- 
mended the  adoption  of  the  quadrant  of  a  terres- 
trial meridian  as  the  basis  of  a  new  system  of 


THE  METRIC  SYSTEM.  U 

weights  and  measures.  In  pursuance  of  this  recom- 
mendation measurements  by  Delambre  and  Mechain 
were  taken  between  Dunkirk  and  Barcelona,  and 
the  length  of  the  quadrant  calculated.  After  the 
prosecution  of  further  experiments,  with  a  view  to 
the  verification  of  the  calculations,  a  decree  was 
issued  in  1793  which  contained  a  schedule  of  new 
weights  and  measures,  with  equivalents  of  the 
ancient  system.  This  schedule  was  ordered  to  be- 
come operative  July  1,  1794.  On  March  7,  1795, 
another  decree  was  issued  in  which  the  present 
metric  system  was  definitely  organized.  There  was 
much  opposition  on  the  part  of  the  French  people 
to  the  substitution  of  the  new  for  the  old  system, 
and  consequently  the  government  modified  its  de- 
cree in  1812  and  permitted  the  use  of  a  compromise, 
which  was  called  the  ^^System  Usuel."  Twenty-five 
years  later,  however,  July  4, 1827,  the  metric  system 
was  made  obligatory  in  France  after  January  1, 
1840.  Its  use  has  since  become  quite  general  in 
Europe,  it  being  employed  in  ten  out  of  the  fifteen 
gold,  and  in  three  out  of  the  twelve  silver  monetary 
systems,  and  the  employment  of  the  metric  system 
is  permitted  in  Great  Britain  and  in  Russia,  and  it 
is  legalized  by  enactment  passed  July  28,  1866,  in 
the  United  States. 

The  International  Standard  metre  is  deposited 
at  the  International  Bureau  of  Weights  and  Meas- 
ures at  Paris.  After  the  adoption  by  the  United 
States  of  the  metric  system  standards  were  pre- 
pared by  the  Geodetic  Bureau  of  the  various 
weights  and  measures  required  by  that  system. 
There  were  also  prepared  tables  of  equivalents  for 
use   in   computing  and  expressing  in   customary 


66  FOREIGN  EXCHANGE. 

weights  and  measures  tbose  of  the  metric  system. 
Among  the  standards  above  noted  were  those  for 
the  smallest  divisional  parts,  to  the  20-l,000th  of 
the  gramme,  for  use  in  the  mints  and  assay  offices, 
and  these  are  employed  in  the  delicate  processes  of 
assaying  the  precious  metals.  The  weight  of  fine 
gold  bars  is  expressed  in  Troy  ounces,  and  in  deci- 
mals thereof,  instead  of  in  pennyweights  and 
grains.  To  this  extent,  therefore,  the  Troy  weight 
is  used.  In  the  assay  of  gold,  however,  which  re- 
quires the  utmost  exactness  in  the  determination 
of  the  weight  of  the  samples  selected  for  assay  the 
gramme  and  the  divisional  parts  thereof  are  em- 
ployed exclusively. 

It  is  noteworthy  that  to  such  perfection  has  the 
process  of  assay  of  gold  been  brought  at  the  office 
in  New  York  that  absolutely  pure  metal,  without 
even  a  trace  of  alloy  or  baser  metal,  is  produced. 
Gold  of  this  fineness,  however,  is  manufactured 
only  for  the  purposes  of  the  office,  and  in  order  to 
serve  as  a  standard  for  the  determination  of  the 
fineness  of  other  samples  of  gold.  Usually  the  small 
bars  which  are  manufactured  for  sale  to  jewelers 
and  for  employment  in  the  arts  contain  a  small  pro- 
portion of  baser  metal.  What  are  known  as  com- 
mercial bars,  which  are  required  for  export,  have  a 
somewhat  larger  proportion  of  baser  metal,  other- 
wise there  would  be  loss  from  abrasion  in  transpor- 
tation. It  may  be  noted,  however,  that  the  stamp  of 
the  United  States  Assay  Office,  certifying  to  the 
weight  and  fineness  of  these  commercial  bars,  is 
customarily  accepted  at  European  assay  offices 
without  question. 

The  metric  system  of  weights  has  made  possible 


THE  METRIC  SYSTEM.  $7 

the  exact  determination  of  the  minted  value  of  the 
moneys  of  account  of  the  various  commercial  na- 
tions of  the  world.  Though  the  Troy  standard  of 
weights  is  still  generally  employed  in  Great  Britain 
and  in  the  United  States,  the  accuracy  of  these 
weights  is  susceptible  of  proof,  should  such  test  be 
necessary,  by  comparison  with  the  more  scientific 
metric  weight.  It  would  seem  impossible,  there- 
fore, that  any  variation  in  the  Troy  standard,  such 
as  was  discovered  in  1758,  when  the  pound  was 
found  to  be  one  and  a  half  grains  too  heavy,  thus 
involving  a  loss  to  the  Government  of  about  six 
cents  per  pound,  can  remain  undetected.  The  mint- 
ed value  of  all  the  moneys  of  account  must  there- 
fore be  regarded  as  the  basis  for  establishing  abso- 
lute Pars  of  exchange. 


CHAPTER  XII. 

THE  DOMINATING  INFLUENCE  OF  MONEY  RATES 
UPON  EXCHANGE— A  NOTABLE  ILLUSTRATION 
IN  1896— CREDITS  ADVANTAGEOUSLY  EMPLOYED 
IN  EUROPE  BECAUSE  OF  RELATIVELY  HIGHER 
RATES  THERE  THAN  IN  NEW  YORK— HOW 
THESE  FOREIGN  LOANS  WERE  EFFECTED 
THROUGH  INVESTMENT  BILLS— MAGNITUDE  OF 
THE  LOANS  SO  PLACED  IN  1900— A  REVERSAL  OF 
MONETARY  CONDITIONS  IN  1901  CAUSED  LARGE 
BORROWING   OF  FOREIGN   CAPITAL. 

In  forecasting  the  probable  course  of  foreign 
exchange  with  a  view  to  the  determination  of  the 
likelihood  of  success  in  operations  extending  over 
comparatively  long  periods  the  prospective  relative 
conditions  of  the  money  markets  at  New  York  and 
at  European  financial  centres  often  are  highly  im- 
portant factors  for  consideration.  Indeed,  occa- 
sionally changes  in  monetary  conditions  are  of  such 
a  character  as  almost  entirely  to  counteract  the  in- 
fluence upon  foreign  exchange  of  the  international 
trade  situation. 

A  notable  illustration  of  the  dominating  influ- 
ences of  monetary  conditions  upon  the  exchange 
market  was  presented  late  in  1896.  It  is  noteworthy 
that  then  was  the  first  time  in  twelve  years  that 
foreign  bankers  had  been  enabled  to  take  advantage 
of  conditions  of  the  money  market  to  conduct  opera- 


MONEY  RATES  AND  EXCHANGE.  69 

tions  in  foreign  exciiange  having  for  their  object 
the  advantageous  employment  of  credits  in  the 
European  markets.  The  favorable  outlook  for  im- 
proved currency  conditions  resulting  from  the 
Presidential  election  of  that  year,  had,  however,  an 
important  influence  contributing  to  the  success  of 
these  negotiations. 

The  operations  of  the  character  referred  to  were 
of  such  importance  that  it  will  be  of  interest  to 
recall  the  circumstances  under  which  they  were 
then,  and  have  at  intervals  since,  been  conducted. 
Owing  partly  to  political  complications  in  Europe, 
discounts  in  London  were  comparatively  high  to- 
ward the  end  of  1896.  The  restoration  of  confi- 
dence in  the  stability  of  our  currency  which  imme- 
diately followed  the  election  of  President  McKinley 
had  such  a  decided  effect  upon  our  money  market 
as  to  cause  rates  for  loans  to  fall  to  extremely  low 
figures.  The  opportunity  was  thereby  offered  our 
foreign  bankers  to  loan  their  balances  and  credits 
in  London  at  more  remunerative  rates  than  could 
be  obtained  in  New  York.  The  transfer  of  balances 
was  effected  through  quite  simple  operations  in 
foreign  exchange,  international  trade  conditions 
favoring  these  transactions.  Our  merchandise  ex- 
ports for  the  calendar  year  1896  were  extremely 
large;  indeed,  the  statistics  for  the  twelve  months 
showed  11,005,837,241  of  such  exports,  the  greatest 
ever  recorded,  while  the  merchandise  balance  for 
the  year  was  1324,257,685.  These  results  had,  it 
may  be  noted,  been  foreshadowed  early  in  the  fall 
months  by  an  abundant  supply  of  commercial  bills. 

Immediately  following  the  Presidential  election 
our  foreign  bankers  began  to  accumulate  credits  in 


70  FOREIGN  EXCHANGE. 

London  by  permitting  the  proceeds  of  the  commer- 
cial drafts,  which  they  had  bought  and  were  then 
purchasing,  to  remain  with  their  correspondents, 
by  whom  the  credits  were  loaned  at  high  rates  in 
the  London  market.  The  sixty  or  ninety  day  bank- 
er's bills  which  were  drawn  against  these  credits 
were  not  forwarded  for  presentation,  but  they  were 
carried  or  borrowed  upon  in  the  New  York  market 
at  the  then  low  rates  for  money.  Hence  these 
bankers'  drafts  took  the  name  of  investment  bills, 
they  representing  the  investment  of  credits  in  Lon- 
don. The  operation  was  profitable  so  long  as  rates 
for  discounts  ruled  relatively  higher  at  the  British 
capital  than  here.  The  profits  of  the  operation 
were  further  enhanced  by  the  difference  in  the  price 
of  the  long  sterling  bill  and  the  price  realized  for 
the  draft  when  it  matured  at  the  expiration  of  the 
sixty  or  ninety  days  for  which  it  was  originally 
drawn. 

By  the  end  of  January,  1897,  discounts  in  London 
grew  easier.  Owing  to  the  absorption  of  commercial 
bills,  through  continued  purchases,  and  the  with- 
holding of  long  sterling  for  the  purposes  of  invest- 
ment the  exchange  market  grew  firmer.  There 
then,  for  these  reasons,  being  little  profit  in  the 
operations  above  noted,  they  partially  ceased, 
though  in  many  cases  the  maturing  drafts  were  ex- 
changed for  long  sterling  with  the  object  of  extend- 
ing the  investment  for  a  further  period  of  sixty  or 
ninety  days.  By  the  end  of  April,  however,  all  these 
investment  operations  had  been  closed  out,  and  it 
was  then  estimated  that  they  had  amounted,  from 
the  beginning,  to  upwards  of  |60,000,000.  At  inter- 
vals subsequently,  when  the  monetary  conditions 


MONEY  RATES  AND  EXCHANGE.  71 

were  favorable,  the  opportunities  for  profit  in  such 
operations  were  embraced  not  only  by  foreign 
bankers,  but  by  domestic  banks  whose  attention 
was  attracted  thereto. 

In  1900  these  operations  were  of  greater  magni- 
tude than  ever  before,  and  at  one  time  the  invest- 
ments in  long  sterling  were  considerably  in  excess 
of  1100,000,000.  Moreover,  the  accumulated  credits 
in  London  resulting  from  such  operations  were  so 
large  that  the  greater  part  of  the  American  pur- 
chases of  international  bonds,  including  British 
consols  and  Exchequer  bills,  and  the  German  Impe- 
rial loan,  were  settled  for  with  outstanding  credits. 
We  have  here  outlined  the  process  of  investments 
in  sterling  when  discounts  abroad  were  relatively 
higher  than  rates  for  money  jn  New  York. 

A  most  striking  example  of  the  influence  of  mon- 
etary conditions  adverse  to  this  country  was  ex- 
hibited early  in  1901.  Notwithstanding  the  fact 
that  for  eight  months  of  the  calendar  year  exports 
of  commodities  against  which  commercial  bills 
were  chiefly  drawn,  were  |55,536,703  in  excess  of 
those  for  the  same  time  in  the  previous  year  and 
also  that  even  the  merchandise  movements  repre- 
senting all  exports  for  this  period  were  |22,668,298 
greater  than  those  of  1900,  rates  for  exchange  dur- 
ing the  seven  months  ending^  with  August  ruled  at 
comparatively  high  rates.  This  was  clearly  the  re- 
sult of  the  dominating  influence  of  adverse  mone- 
tary conditions  which  began  to  be  felt  early  in 
April,  and  which  continued  to  be  exerted  notwith- 
standing the  favorable  internationl  trade  situation 
above  noted.  High  rates  for  money  here  and  low 
discounts  abroad  caused  the  borrowing  of  enor- 


72  FOREIGN  EXCHANGE. 

mous  amounts  of  money  in  Europe  through  ex- 
change loans,  and  there  was  likewise  speculative 
selling  of  sixty  to  ninety  day  bills.  These  opera- 
tions not  only  absorbed  credits  against  commercial 
drafts,  but  they  resulted  in  the  creation  of  a  short 
interest  in  exchange  of  great  magnitude,  amount- 
ing, as  estimated  by  a  prominent  banker,  to  more 
than  1300,000,000,  or  equal  to  the  value  of  the  entire 
volume  of  exported  commodities  since  April. 


CHAPTER  XML 

THE  INFLUENCE  OF  EXCHANGE  UPON  RATES  FOR 
MONEY— HOW  THE  LONDON  DISCOUNT  MARKET 
IS  SOUGHT  TO  BE  CONTROLLED  BY  THE  BANK 
OF  ENGLAND— WITHDRAWALS  OF  GOLD  RE- 
TARDED BY  AN  ADVANCE  IN  DISCOUNTS— SENSI- 
TIVENESS OF  MONEY  TO  EXCHANGE  CONDI- 
TIONS. 

The  dominating  influence  of  rates  for  money 
upon  those  for  exchange  having  been  shown  in  the 
previous  chapter,  it  may  be  of  interest  to  note  the 
influence  which  is  often  exerted  upon  rates  for 
money,  especially  in  London,  by  those  for  exchange 
in  New  York  or  in  Paris  or  Berlin,  which  influence 
is  quite  marked  whenever  rates  for  exchange  move 
toward  a  point  threatening  a  drain  of  gold  from 
London  to  New  York  or  to  the  continent. 

Theoretically,  the  Bank  of  England  controls  the 
discount  market  at  London.  This  control  is  sought 
to<  be  maintained  through  the  official  rate  of  dis- 
count at  the  Bank,  which  is  advanced  when  the 
stock  of  bullion  in  the  Bank  is  seriously  threatened, 
by  a  fall  in  exchange,  with  reduction  either  through 
a  drain  of  gold  to  the  continent  or  to  New  York. 
Whenever  conditions  prevail  which  make  it  inad- 
visable to  advance  the  Bank  rate,  a  resort  is  had  to 
the  exaction  of  a  higher  price  for  gold,  either  bars 
or  coin,  and  this  course  is  usually  elBfective  in  pre- 
venting a  drain  of  gold  from  the  Bank  or  from  the 


74  rOREIGN  EXCHANGE. 

bullion  market,  and  it  also  contributes  to  divert 
the  demand  for  gold  from  London  to  Paris.  Some- 
times when  the  Bank  is  unable  to  maintain  control 
of  the  discount  market,  by  reason  of  the  prevalence 
of  abnormal  monetary  conditions,  the  Bank  seeks 
to  regain  control  through  borrowings  upon  its  secu- 
rities, thus  temporarily  increasing  the  demand  for 
discounts.  Should  this  course  not  be  effective,  re- 
sort is  had  to  an  advance  in  the  Bank  rate.  The 
various  steps  above  outlined  looking  to  the  protec- 
tion of  the  bullion  reserve  of  the  Bank  are  prompt- 
ed by  the  adverse  changes  in  the  tone  of  the  market 
for  exchange  upon  London,  either  sterling  or  conti- 
nental, which  directly  influence  discount  rates. 

The  effect  of  exchange  conditions  upon  money 
rates  is  less  observable  in  Paris  than  elsewhere  as 
is  shown  by  the  fact  that  discount  rates  at  the 
French  capital  are  more  stable.  Changes  in  the 
official  rate  of  the  Bank  of  France  are  seldom  made, 
and  then  only  during  financial  or  political  derange- 
ments. Tho  Bank  of  France  instead  of  changing 
its  discount  rate  protects  its  stock  of  gold  by  ad- 
vancing the  price  of  the  metal  when  withdrawal  is 
threatened.  Exchange  at  Paris  or  at  other  conti- 
nental centres  on  London  has  quite  as  decided  an 
influence  upon  discounts  at  the  British  capital  as 
has  the  exchange  market  in  New  York.  The  con- 
tiguity of  the  European  centres  facilitates  almost 
constant  investments  in  exchange  on  London  and 
buying  and  selling  of  this  exchange  are  responsive 
to  prevailing  monetary  conditions  at  the  various 
centres.  Liberal  sales  of  exchange  on  London, 
either  at  Paris  or  Berlin,  which  foreshadow  a  drain 
of  gold  from  London  to  those  centres,  as  promptly 


INFLUENCE  OF  RATES  UPON  MONEY.  75 

affect  money  rates  at  the  British  capital  as  do  a 
decline  in  rates  for  exchange  at  New  York  on  Lon- 
don.  On  the  contrary,  purchases  at  Paris  or  Berlin 
of  exchange  on  London  forecast  a  movement  of 
gold  to  the  British  capital  as  the  result  of  the 
higher  rates  for  such  exchange  and  hence  discounts 
at  London  grow  easier.  Moreover,  when  the  drain 
of  gold  has  been  diverted  from  London  to  Paris  the 
price  of  the  metal  at  the  British  capital  declines. 

The  sensitiveness  of  money  to  exchange  condi- 
tions is  more  acute  in  Europe  than  it  is  in  New 
York  because  there  is  almost  a  constant  struggle 
among  nations  abroad  to  acquire  the  metal  or  to  re- 
tain their  stocks  of  gold  either  for  financial  or  for 
political  reasons.  Negotiations  of  international 
loans  of  greater  or  less  magnitude  are  almost 
always  in  progress  and  naturally  there  is  a  desire 
on  the  part  of  bankers  at  the  chief  centres  to  profit 
through  these  negotiations.  Hence  their  influence 
is  exerted  to  cause  an  accumulation  of  gold  in  their 
respective  national  repositories  with  a  view  to  the 
cheapening  of  rates  for  money  and  the  maintenance 
of  easy  monetary  conditions.  This  object  can  often 
best  be  attained  through  the  exchange  market  and 
the  diversion  by  bankers  of  bills  for  discount  from 
their  own  to  neighboring  centres.  In  this  way  the 
local  discount  market  is  relieved  and  the  proceeds 
of  the  discounted  bills  are  accumulated  at  contigu- 
ous foreign  capitals  to  be  drawn  upon  as  occasion 
may  require  through  the  sale  of  exchange  upon 
these  centres.  Thereby  disturbance  to  the  money 
market  which  is  sought  to  be  protected  is  avoided 
through  this  adroit  manipulation  of  exchange. 

Sometimes  the  more  direct  method  of  protecting 


76  FOREIGN  EXCHANGE. 

the  money  market  through  sales  of  securities  is 
resorted  to  and  indeed  this  course  is  frequently 
pursued  in  Loudon  when  that  centre  is  menaced  by 
a  demand  for  gold  from  New  York.  Liberal  sales 
of  American  securities  naturally  create  a  demand 
for  exchange  with  which  to  pay  for  the  stocks,  and 
rates  for  exchange  rise  beyond  the  point  at  which 
gold  can  be  profitably  drawn  from  the  menaced 
centres. 

We  have  here  outlined  the  manner  in  which  ex- 
change conditions  influence  the  money  market  and 
the  measures  which  are  resorted  to  for  the  purpose 
of  counteracting  these  influences.  There  are  occa- 
sions, however,  when  exchange  conditions  are  so 
overwhelmingly  dominant  as  to  render  nugatory  all 
efforts  to  protect  those  markets  for  money  which 
are  menaced  by  the  demand  for  gold.  Then,  con- 
trary to  the  custom  here,  w^here  gold  is  obtainable 
without  delay  or  obstruction,  the  European  banks 
seek  in  various  ways  to  defer  response  to  the  de- 
mand and  when  the  inquiry  can  no  longer  be  evaded 
or  postponed  obstacles  are  interposed  which  make 
the  procurement  of  the  metal  for  export  as  diflftcult 
and  as  expensive  as  possible.  This  course  is  taken 
in  order  to  minimize  the  effect  upon  the  money  mar- 
ket of  the  withdrawals  of  gold,  the  obstacles  pre- 
sented to  the  export  movement  operating  tempo- 
rarily to  retard  the  shipment  of  the  metal.  Very 
rarely  is  the  movement  of  gold  hither  from  Europe 
free,  in  the  sense  that  it  is  not  obstructed,  so  tena- 
ciously do  foreign  banks  guard  their  supplies  of  the 
metal  for  the  purpose  of  avoiding  derangements 
of  their  money  markets  through  this  form  of  inter- 
national  exchange  settlements, 


CHAPTER  XIV. 

CONSIDERATION  OF  THE  INTERNATIONAL  TRADE 
SITUATION  NECESSARY  IN  EXCHANGE  OPERA- 
TIONS—NEUTRALIZING EFFECT  UPON  FAVOR- 
ABLE TRADE  CONDITIONS  OF  A  RETURN  MOVE- 
MENT OF  SECURITIES. 

In  endeavoring  to  forecast  the  course  of  the  for- 
eign exchange  market  with  a  view  to  operations 
therein,  whether  speculative  or  otherwise,  it  is 
essential  carefully  to  consider  international  trade 
conditions  and  prospects  as  well  as  relative  mone- 
tary conditions  in  this  country  and  in  Europe. 
Should  merchandise  exports  promise  to  be  large 
and  gradually  increasing  in  volume,  while  imports 
were  likely  to  be  small  or,  at  least,  not  excessively 
great,  there  would  seen!  to  be  good  reason  for  ex- 
pecting an  augmentation  of  the  merchandise  bal- 
ance in  favor  of  this  country,  and,  consequently, 
that  rates  for  exchange  would  rule  at  low  figures 
during  the  seasons  when  exports  of  commodities 
were  largest. 

A  counteracting  effect  upon  the  course  of  ex- 
change would,  however,  be  exerted  should  there  be 
a  prevalence  of  such  monetary  conditions  abroad 
as  would  cause  discounts  at  the  principal  financial 
centres  of  Europe  to  rule  at  relatively  lower  rates 
than  here;  or  should  rates  for  money  abroad  be 


78  FOREIGN  EXCHANGE. 

relatively  higher  than  those  in  New  York.  Under 
the  influence  of  dearer  money  abroad,  exchange 
would  be  more  or  less  in  request  for  the  remittance 
of  balances  for  employment  in  Europe,  and  at  the 
same  time  exchange  would  be  accumulated  and  the 
resulting  credits  loaned  on  the  foreign  markets. 
The  general  tendency  of  rates  would,  however,  be 
downwards.  On  the  other  hand,  relatively  dearer 
money  here  than  in  Europe  would  cause  the  almost 
constant  negotiation  of  exchange  loans  and  the 
prompt  drawing  of  current  balances  or  credits  re- 
sulting from  the  payment  of  commercial  bills,  rep- 
resenting exports  of  commodities,  which  opera- 
tions would  result  in  the  maintenance  of  compara- 
tively high  rates  for  exchange,  especially  if  the  ex- 
change loans  were  of  magnitude  sufficient  to  absorb 
the  current  offerings  of  such  commercial  bills. 

It  will  be  observed,  therefore,  that  relative  mone- 
tary conditions  must  be  considered  in  forecasting 
the  course  of  the  exchange  market  as  well  as  the 
international  trade  situation.  These  monetary 
conditions  are  usually  capable  of  being  more  or  less 
accurately  foreseen  through  a  study  of  the  existing 
or  prospective  financial  and  commercial  situation 
and  of  industrial  development.  Sometimes,  how- 
ever, sudden  and  unexpected  events  lead  to  import- 
ant derangements  in  the  situation  and  a  radical  re- 
versal of  the  course  of  the  exchange  market  follows 
through  a  resort  to  measures  for  the  relief  of  the 
financial  tension.  Another  cause  for  derangement 
which  cannot  be  foreseen  is  the  abnormal  interna- 
tional movement  of  securities.  A  normal  move^ 
ment  is  almost  constantly  in  progress  and,  there- 
fore, unless  the  transfer  of  securities  siiddenly  in^ 


INTERNATIONAL   TRADE    SITUATION.  79 

creases  it  attracts  comparatively  little  attention. 
Whenever  the  volume  of  securities  which  are  being 
transferred  is  greatly  augmented  the  effect  upon 
the  exchange  market  is  immediate,  an  outflow  of 
such  properties  causing  a  decline,  while  an  influx 
brings  about  an  advance  in  rates  for  exchange. 

There  have  in  recent  years  been  several  occasions 
when  the  effects  of  favorable  international  trade 
conditions  have  been  unexpectedly  neutralized 
through  radical  changes  in  relative  monetary  con- 
ditions or  through  abnormal  movements  of  securi- 
ties or  both  these  influences.  A  most  striking  illus- 
tration of  the  apparent  complete  neutralization  of 
favorable  trade  conditions,  through  a  return  move- 
ment of  securities  was  presented  early  in  the  spring 
of  1901.  Nearly  twelve  months  previously,  or  soon 
after  the  passage  of  the  Gold  Standard  law,  and 
influenced  by  that  enactment,  there  was  almost  a 
simultaneous  demand  here  and  in  Europe  for 
American  railroad  securities  for  speculative  and 
for  investment  purposes.  Later,  however,  large 
amounts  of  the  securities  which  had  so  recently 
been  bought,  and  also  those  which  had  long  been 
held  abroad  were  sold  chiefly  to  take  advantage  of 
the  high  prices  ruling  for  them.  This  selling  move- 
ment was  continuous  for  the  remainder  of  the  year, 
and  it  was  greatly  influenced  by  deranged  indus- 
trial conditions  in  Germany  which  seemed  to 
threaten  more  or  less  financial  disturbance,  and, 
with  a  view  to  prepare  for  possible  trouble  of  this 
character,  the  Germans  were  among  the  largest 
sellers  of  our  securities. 

During  the  first  four  months  of  1901,  Europeans 
took  advantage  of  the  boom  in  prices  and  still  more 


80  FOREIGN  EXCHANGE. 

freely  disposed  of  their  holdings.  The  Northern 
Pacific  crisis  in  May  seemed  to  induce  even  more 
liberal  selling  of  American  securities,  and  it  is  be- 
lieved that  this  return  hither  of  European  stock 
holdings  not  only  cancelled  the  remainder  of  the 
unliquidated  international  trade  balance,  but  left 
this  country  very  largely  indebted  to  Europe  on 
this  account.  It  will  be  observed,  therefore,  that 
what  had  been  claimed  to  be  an  enormous  favorable 
balance  of  trade  which,  superficially  viewed,  was 
supposed  to  be  unmistakable  evidence  of  the  high- 
est degree  of  prosperity,  was,  in  the  comparatively 
brief  period  of  sixteen  months,  liquidated  largely 
through  the  return  movement  of  securities. 

Almost  concurrently  with  this  noted  reversal  of 
the  international  trade  situation  there  came  a 
marked  change  in  relative  monetary  conditions  be- 
tween this  country  and  Europe.  Instead  of  our 
bankers  loaning  their  balances  in  the  foreign  mar- 
kets, as  had  been  done  so  freely  in  the  previous 
year,  these  bankers  borrowed  largely  from  Europe 
through  exchange  loans,  thus  increasing  the  indebt- 
edness which  had  resulted  from  the  return  of  secu- 
rities. The  demand  for  foreign  capital  for  use  in 
our  market  was  greatly  due  to  the  fact  that  the 
stocks  and  bonds  which  had  been  brought  hither 
from  Europe  remained  undigested,  necessitating 
the  negotiation  of  loans  for  the  special  purpose  of 
carrying  these  securities  until  they  could  be  mar- 
keted. Eequirements  for  money  for  domestic  uses 
were  large  and  in  excess  of  the  supply,  and,  conse- 
quently, rates  for  money  continued  to  rule  relative- 
ly higher  here  than  in  Europe.  The  partial  destruc- 
tion of  the  corn  crop  by  drouth,  the  lamentable 


INTERNATIONAL   TRADE    SITUATION.  81 

death  of  President  McKinley  and  the  withholding 
of  cotton  were  among  the  influences  directly  or  in- 
directly contributing  to  the  derangement  in  the 
monetary  and  the  exchange  situation. 


CHAPTER  XV. 

THE  INTERNATIONAL  BALANCE  OF  TRADE— ERRO- 
NEOUS IMPRESSIONS  CORRECTED— HOW  FAVOR- 
ABLE BALANCES  ARE  CURRENTLY  LIQUIDATED 
—NO  ACCUMULATION  OF  FOREIGN  INDEBTED- 
NESS RESULTING  FROM  TRADE  MOVEMENTS- 
SECURITIES  TilE  PRINCIPAL  MEDIUM  FOR  AD- 
JUSTMENT OF  BALANCES. 

The  prevailing  impression  among  those  who  have 
not  given  the  subject  careful  study  seems  to  be  that 
what  is  known  as  the  international  balance  of 
trade,  or  the  excess  of  exports  over  imports  of  mer- 
chandise, specie  and  bullion,  is  a  sum  which  accu- 
mulates from  time  to  time,  and  is  suffered  to  re- 
main almost  wholly  unliquidated  until  the  period 
arrives  when  it  shall  become  necessary  or  desirable 
for  the  creditor  nation  to  collect  this  balance.  Also 
that  when  the  liquidation  of  such  balance  shall  be 
required,  the  debtor  nation  must  make  settlement, 
either  with  securities  or  other  things  of  value, 
which  may  be  acceptable  to  the  creditor  nation,  or 
gold  must  be  forwarded  in  liquidation.  Hence  the 
remark  is  frequently  made  by  those  who  take  a 
superficial  view  of  the  international  trade  balance, 
as  disclosed  by  the  statistics  of  our  commercial 
transactions,  that  because  our  exports  of  merchan- 
dise, specie  and  bullion  are  or  have  been  for  a  con- 
siderable period  greatly  in  excess  of  the  imports, 


THE  INTERNATIONAL  BALANCE  OP  TRADE.   83 

therefore  there  must  be  an  enormous  balance  of  in- 
debtedness due  this  country  by  foreign  countries, 
even  admitting  that  this  balance  has  been  partially 
liquidated,  or  offset  in  various  ways,  such  as 
through  payments  for  freight,  insurance,  interest 
on  securities,  expenditures  by  Americans  residing 
abroad  and  by  tourists,  v^hich  items,  together, 
make  up  what  is  called  the  invisible  or  indetermin- 
able balance  against  this  country. 

During  the  six  calendar  years  ending  with 
1901,  the  excess  of  exports  over  imports  of  mer- 
chandise, specie  and  bullion,  as  reported  by  the 
bureau  of  statistics  of  the  Treasury  Department, 
amounted  to  the  enormous  sum  of  $3,036,422,332. 
As  the  returns  for  each  successive  year  were  com- 
piled and  made  public  they  were  regarded  as  unmis- 
takable evidences  of  almost  unexampled  prosper- 
ous conditions,  and  doubtless  there  were  many  who 
wondered  how  such  a  stupendous  favorable  balance 
of  trade  could  be  liquidated  without  monetary  de- 
rangement in  every  financial  centre  of  Europe.  The 
explanation  given  in  connection  with  these  annual 
statistics  of  our  commerce  that,  as  an  offset  to  this 
balance,  there  must  be  deducted  an  estimated 
amount  of  between  |150,000,000  and  |250,000,000, 
representing  the  invisible  adverse  balance,  was 
generally  lightly  regarded  because,  even  after  de- 
ducting the  maximum  annual  sum  of  |250,000,000, 
there  would  remain  each  year  an  apparent  unliqui- 
dated balance  of  from  |61,560,317  in  1896,  in  which 
year  the  excess  of  exports  over  imports  was  least, 
to  1412,303,259  in  1900,  when  this  excels  was  great- 
est. Moreover,  upon  the  assumption  that  the  bal- 
ance at  the  end  of  each  year  remained  unliquidated 


84  FOREIGN  EXCHANGE.  i 

and  that  it  was  added  to  that  of  the  ensuing  year, 
the  net  indebtedness  at  the  close  of  1901  would,  for 
the  six  years,  amount  to  |1,536,422,332,  after  de- 
ducting 11,500,(^00,000,  representing  the  invisible 
balance  for  these  years. 

The  impression  generally  conveyed  by  these 
enormous  sums  was  that  the  United  States  had 
actually  become  the  paramount  creditor  nation  of 
the  commercial  world,  and  that  we  possessed  the 
power  to  draw  from  Europe  indefinite  amounts  of 
gold  whenever  final  liquidation  of  our  credit  bal- 
ance should  be  demanded  of  foreign  countries.  The 
suggestion  that  such  liquidation  could  be,  and,  in- 
deed, might  have  been  largely  effected  through  the 
return  of  American  securities  held  abroad,  was  re- 
ceived with  expressions  of  doubt,  for  it  seemed  to 
be  generally  believed  that  Europe  had  sent  hither, 
from  time  to  time,  such  large  amounts  of  our  secu- 
rities that  comparatively  few  of  them  remained 
abroad,  and  that  not  enough  could  be  gathered  to 
make  much  of  an  impression  upon  the  balance  of 
her  indebtedness.  In  support  of  the  theory  that 
Europe  was  dependent  upon  this  country,  by  rea- 
son of  our  enormous  credit  balance,  for  financial 
assistance,  the  fact  was  pointed  out  that  the  prin- 
cipal European  nations  had,  during  the  calendar 
year  1900,  borrowed  from  the  United  States  on  in- 
ternational securities  at  least  |100,000,000,  and 
that  vast  amounts  had  been  loaned  to  foreign  bank- 
ers, in  the  form  of  accumulated  current  credits, 
resulting  from  the  collection  of  commercial  drafts, 
thus  largely  increasing  Europe's  indebtedness  to 
this  country. 

It  is  not  surprising,  therefore,  that  with  the  im- 


THE  INTERNATIONAL  BALANCE  OP  TRADE.   85 

pressions  so  generally  prevailing,  there  was  such 
skepticism  manifested  regarding  the  evidence 
which  was  presented  during  the  fall  of  1901,  not 
only  of  the  complete  liquidation  of  our  internation- 
al balance,  but  of  the  existence  of  an  enormous  in- 
debtedness of  our  bankers  to  those  of  Europe. 
When  the  fact  is  considered,  however,  that  these 
impressions  have  an  erroneous  basis,  the  interna- 
tional trade  situation,  which  seemed  so  inexplica- 
ble, may  be  clarified.  As  a  matter  of  fact,  liquida- 
tion of  international  balances  is  constantly  in  pro- 
gress in  one  form  or  another,  and  at  no  time  can  it 
be  truthfully  said  that  any  important  amounts  are 
due  to  this  country  or  to  our  bankers,  except,  per- 
haps, upon  unmatured  exchange  drafts.  There 
may  be,  at  some  periods,  when  money  can  be  more 
gainfully  emjjloyed  abroad  than  here,  a  temporary 
accumulation  at  European  centres  of  bankers' 
credits,  but  these  are  collectible  at  will,  and  they 
have  nothing  to  do  with  international  balances  ex- 
cept so  far  as  these  credits  result  from  the  payment 
of  commercial  exchange  drafts.  There  are  also  held 
in  this  country  by  individuals  and  corporations  evi- 
dences of  debt  in  the  form  of  international  securi- 
ties which  have  been  bought  for  investment.  These 
also  have  nothing  to  do  with  international  trade 
balances. 

The  producer  of  exportable  commodities,  wheth- 
er these  be  cotton,  grain  or  other  raw  materials  or 
manufactured  articles,  is  paid  for  his  goods  with 
the  proceeds  of  bills  of  exchange,  either  domestic 
or  foreign,  w'aich  the  purchaser  draws.  When  the 
goods  are  delivered  to  the  transportation  lines  for 
movement  out  of  the  country  the  shipper  is  reim- 


86  FOREIGN  EXCHANGE.  '    "  ^ 

bursed  for  his  outlay  through  the  proceeds  of  the 
foreign  bill  of  exchange,  which  he  sells  to  the  for- 
eign banker.  This  banker  is,  in  turn,  reimbursed 
for  his  outlay  through  the  payment  of  this  bill  at 
maturity,  and  each  export  transaction  eventually 
terminates  with  the  placing  with  the  correspondent 
of  the  banker,  or  the  drawee  of  the  bill,  at  foreign 
centres,  of  the  credit  resulting  from  the  collection 
of  the  indebtedness  caused  by  the  export  hence  of 
the  goods.  Against  this  credit  the  banker  draws 
his  own  bills,  which  he  sells  to  importers  of  goods 
from  abroad,  in  this  way  reimbursing  his  credit, 
and  thus  the  amount  of  the  current  imports  are 
made  to  offset,  to  a  certain  extent,  or  as  far  as  they 
will  go,  the  amount  of  the  current  exports.  Any  re- 
sulting balance  of  credits  undrawn  for  does  not 
long  remain  unliquidated.  Such  credits  may  be 
used  for  the  purchase  of  securities,  which  can  be 
profitably  bought  abroad  through  arbitrage  opera- 
tions for  sale  in  this  country;  they  may  be  employed 
in  loans,  either  floating  or  fixed,  should  money  be 
more  valuable  here  than  in  Europe;  they  may  be 
drawn  against  for  the  purchase  to  the  banker's  ad- 
vantage of  anything  of  value  which  will  yield  a 
profit,  whether  securities  or  gold,  which  metal,  it 
may  be  noted,  is  treated  as  merchandise  whenever 
it  leaves  the  country  in  which  it  originated,  and 
the  credits  may  be  and,  indeed,  are  drawn  against 
to  remit  for  the  items  of  the  invisible  balance 
above  enumerated. 

Whatever  may  remain,  after  the  current  adjust- 
ments of  the  international  balances  and  the  em- 
ployments of  credits  in  the  manner  indicated^  may 
be  regarded  as  temporary  additions  to  the  capital 


THE  INTERNATIONAL  BALANCE  OP  TRADE.   87 

of  the  banker,  to  be  employed  by  him  as  opportu- 
nity offers,  and  not  in  any  sense  the  property  of 
those  of  our  exporters  who  have  contributed  to  the 
creation  of  these  credits,  for,  as  has  been  stated, 
their  claims  have  been  transferred  to  the  foreign 
bankers.  It  is  true  that  a  large  favorable  interna- 
tional balance  of  trade  is  evidence  of  prosperous 
conditions,  for  it  enables  our  capitalists  and  invest- 
ors to  absorb  increased  amounts  of  the  securities 
which  are  from  time  to  time  brought  hither  from 
Europe,  and  the  stimulus  of  the  higher  prices  ob- 
tained here  tends  to  augment  such  movement. 


CHAPTER  XVI. 

WHY  GERMANS  ARE  EXPERIENCED  CAMBISTS— 
THE  SYSTEM  OF  INSTRUCTION  IN  THE  SCHOOLS 
THOROUGH— SYSTEMATIC  EDUCATIONAL  METH- 
ODS PURSUED— CAREFUL  TRAINING  IN  COUNT- 
ING HOUSES  AND  BANKS— HOW  IMPERFECTIONS 
IN  THE  EARLY  EDUCATION  OF  AMERICANS  CAN 
BE  REMEDIED. 

It  is  worthy  of  note  that  the  most  successful 
operators  in  foreign  exchange  are  Germans.  They 
seem  to  have  established  themselves  in  the  great 
commercial  centre  of  London  which,  for  centuries, 
has  been  the  principal  foreign  exchange  city  of  the 
world,  they  are  found  in  every  important  trade 
locality,  they  closely  follow  the  flags  of  all  nations 
wherever  these  emblems  may  be  planted,  and  there 
is  scarcely  an  exchange  house  in  this  country  which 
has  not,  either  as  manager  or  in  some  important 
position,  a  native  of  some  one  of  the  States  of  the 
German  Empire.  One  chief  reason  for  this  pre- 
dominance of  Germans  in  this  branch  of  the  bank- 
ing business  is,  as  is  claimed  by  bankers  of  that 
nationality,  that  they  are  thoroughly  educated 
in  their  schools  at  home,  and  are  systematically 
trained  in  the  business  houses  where  they  obtain 
their  early  employment.  Thus  they  acquire  a  prac- 
tical knowledge  of  every  business  detail  and  they 
are  enabled  to  obtain  positions  in  banking  estab- 


WHY  GERMANS  ARE  EXPERIENCED  CAMBISTS.  89 

lishments  in  which  they  make  rapid  advancement. 
When  they  become  qualiHed  they  are  either  trans- 
ferred to  branches  of  the  home  institution  or  they 
migrate  to  localities  which  seem  more  promising 
and  soon  succeed  in  establishing  themselves  in  pro- 
fitable business. 

The  pupil  in  the  German  schools  usually  remains 
until  his  seventeenth  year,  and,  in  some  cases,  until 
he  is  nineteen  or  twenty.  Between  the  ages  of  six- 
teen and  seventeen  he  must  be  examined  for  one 
year's  service  in  the  army.  He  is  required  to  pass 
in  two  languages  besides  his  ov/n,  in  geography, 
mathematics  in  its  various  branches,  history  and 
other  school  studies,  in  order  to  obtain  his  certifi- 
cate, which  will  entitle  him  to  secure  the  limitation 
of  one  year,  instead  of  two  or  three  years,  in  the 
army.  Without  such  certificate  it  is  almost  impos- 
sible for  the  boy  to  be  admitted  to  any  business 
office,  and  banks  further  require  that  their  clerks 
must  graduate  from  the  high  school,  which  involves 
from  four  to  five  years'  additional  study.  When 
the  student  enters  the  employment  of  a  bank  he  is 
expected  to  be  proficient  in  languages,  in  commer- 
cial and  historical  geography,  in  accounts  in  two 
currencies,  and  in  calculating  foreign  currencies 
and  every  form  of  arbitraging.  It  will  be  observed 
that  the  German  student  is  at  his  graduation  from 
the  high  school  and  his  entry  upon  a  business  or  a 
banking  career,  thoroughly  equipped,  so  far  as  con- 
cerns his  education,  for  the  work  in  which  he  is 
about  to  engage.  His  employer  is  expected  to  give 
him  practical  training  in  the  business,  and  after  a 
three  years'  apprenticeship  the  young  man  serves 
'one  year  in  the  army,  on  the  completion  of  which 


90  FOREIGN  EXCHANGE. 

service  he  travels,  eventually  engaging  in  business 
either  as  clerk  or  in  other  remunerative  employ- 
ment. Not  until  he  is  well  qualified  does  he  receive 
pay  for  his  work,  and  the  rapidity  of  his  promotion 
will  depend  upon  his  attention  to  his  duties. 

The  systematic  course  of  education  which  obtains 
in  Germany  is  in  marked  contrast  with  that  which 
too  generally  prevails  in  this  country.  The  Ameri- 
can boy  is  practically  forced  or  "crammed"  during 
his  progress  through  the  intermediate  grades,  he  is 
superficially  taught  from  established  text  books 
and  drilled  in  the  rules  and  formulas  contained 
therein  without  obtaining  the  knowledge  which  he 
should  acquire  in  order  to  apply  the  theory  to  prac- 
tice. The  examinations  preparatory  to  promotions 
to  higher  grades  are  chiefly  reviews  of  the  lessons 
which  he  has  been  taught  from  the  books,  and  in 
the  study  of  which  he  has  had  comparatively  little 
aid  from  his  teacher.  If  the  pupil  should  fail,  at  his 
examination,  to  obtain  the  requisite  "marks"  to 
entitle  him  to  promotion  he  is  required  to  remain 
in  the  lower  grade  until  the  time  fixed  for  further 
examination.  Should  the  pupil  finally  succeed  in 
graduating  from  the  high  school  he  is  often  in  a 
condition  of  almost  helplessness  when  he  enters  a 
business  career,  and  without  the  aid  of  his  imme- 
diate superiors  or  of  those  of  his  associates  who 
have  had  experience  he  is  enabled  to  make  little 
progress,  even  if  he  should  succeed  in  retaining  his 
position.  Thus  the  clerk  is  handicapped  at  the  out- 
set of  his  business  career  by  imperfect  education 
and  only  through  perseverance  and  continued  study 
can  he  hope  to  obtain  advancement. 

Doubtless  bank  clerks  who  have  begun  their 


WHY  GERMANS  ARE  EXPERIENCED  CAMBISTS.    91 

study  of  exchange  with  the  hope  of  mastering  its 
intricate  problems  have  realized  the  fact  that  they 
were  imperfectly  equipped  for  their  task  through 
deficient  education,  and  many  may  have  become  dis- 
couraged at  the  comparatively  insurmountable  dif- 
ficulties which  have  been  encountered.  There  would 
really  seem  to  be  no  good  reason  for  abandoning 
the  study  of  foreign  exchange  because  of  these  ob- 
stacles, for  they  can  be  overcome  through  persist- 
ent effort,  well  directed  study  and  the  application 
of  rules  which  will  be  found  in  the  text  books  in 
which  the  student  has  been  drilled  during  his 
school  course.  The  first  essential  for  a  systematic 
course  of  instruction  is  perfection  in  arithmetical 
problems,  to  be  follow^ed  by  the  selection  of  exam- 
ples from  bills  of  exchange,  which  are  almost  con- 
stantly passing  under  the  observation  of  junior 
clerks  in  banks.  The  working  out  of  such  examples 
according  to  the  rules  laid  down  in  the  school  text 
books  and  the  proving  of  the  same  will  soon  result 
in  the  establishment  of  accuracy  in  calculations 
and  in  the  adoption  of  short  methods  of  computa- 
tions. 


CHAPTER  XVII. 

ARBITRATION  OF  EXCHANGE— DEVELOPMENT  OF 
THIS  BRANCH  OF  EXCHANGE  OPERATIONS- 
ILLUSTRATION  OF  ARBITRATION  THROUGH  LON- 
DON ON  PARIS— HOW  GOLD  WAS  PROFITABLY 
SHIPPED  HENCE  TO  THE  FRENCH  CAPITAL  IN 
1901— ACCURATE  INFORMATION  AND  EXPERT 
SKILL  ESSENTIAL  FOR  SUCCESS  IN  SUCH 
OPERATIONS— DIFFERENCE  BETWEEN  ARBITRA- 
TION AND  ARBITRAGE  NEGOTIATIONS. 

The  arbitration  of  exchange  is  one  of  the  most 
interesting  operations  in  the  entire  system,  and 
thorough  familiarity  with  the  process  must  be  pos- 
sessed by  exchange  clerks.  This  branch  of  office 
work  is  seldom  entrusted  to  junior  assistants,  the 
calculations  being  somewhat  intricate  and  the  ne- 
cessary knowledge  of  such  a  character  as  is  not  or- 
dinarily possessed  or  readily  obtainable  by  inex- 
perienced employees.  Moreover  errors  are  likely  to 
occur  in  computations  which,  unless  promptly  dis- 
covered, often  result  in  serious  loss.  To  attain 
proficiency  in  operations  involving  arbitration  of 
exchange  the  student  must  familiarize  himself  with 
the  monetary  systems  of  all  commercial  countries, 
those  having  silver  and  paper  as  well  as  gold  cur- 
rencies. He  must  also  acquire  a  knowledge  of  the 
methods  of  quoting  and  the  conditions  usually  gov- 
erning movements  in  the  exchanges  of  these  coun- 


ARBITRATION  OF  EXCHANGE.  98 

tries  and  various  other  details  which  can  best  be 
learned  by  experience  in  a  well  equipped  office.  The 
rules  for  the  computation  of  arbitration  in  ex- 
change are  laid  down  in  the  elementary  works  on 
arithmetic  found  in  the  schools,  but  there  is  a  vast 
deal  of  information  which  is  required  for  the  suc- 
cessful working  of  the  problems  which  knowledge 
must  be  obtained  from  other  sources. 

Before  foreign  exchange  grew  to  be  a  completed 
system  and  while  the  operations  were  confined 
chiefly  to  the  adjustment  of  commercial  transac- 
tions between  countries,  exchange  was  drawn  in  a 
direct  manner.  This  course  was  necessary  because 
of  the  slow  methods  of  communication  through  the 
post  which  made  it  impossible  for  drawers  to  ob- 
tain prompt  advices  of  conditions  of  which  advan- 
tage might  otherwise  have  been  taken.  With  the 
introduction  of  the  telegraph  came  facilities  for  the 
drawing  of  circuitous  as  well  as  of  direct  exchange 
between  European  countries,  and  then  followed  the 
system  of  arbitration  of  exchange.  This  system 
had  grown  to  be  an  important  branch  of  the  busi- 
ness in  Europe  long  before  the  introduction  of  the 
Atlantic  cable,  and  foreigners  had  attained  such 
proficiency  in  arbitrations  that  when  the  cables  be- 
came effective,  foreign  had  a  very  decided  advan- 
tage over  American  bankers.  The  latter  were,  how- 
ever, quick  to  learn,and  the  system  of  arbitration  of 
exchange  was  soon  brought  to  as  high  state  of  per- 
fection between  this  country  and  Europe  as  exist- 
ed abroad.  With  prompt  and  constant  cable  com- 
munication with  all  parts  of  the  world  and  with  re- 
liable advices  of  conditions  favorable  to  all  forms 
of  exchange  operations  the  skilled  Cambist  is  to-day 


»4  FOREIGN  EXCHANGE. 

enabled  to  extract  a  greater  profit  out  of  exchange 
drafts  than  could  have  been  possible  a  quarter  of  a 
century  or  more  ago. 

Brooks,  in  his  work  on  foreign  exchange,  defines 
arbitration  of  exchange  as  the  remitting  of  money 
to  one  country  through  another  country  having  a 
different  monetary  system,  or  the  purchase  of  ex- 
change or  money  of  one  country  through  another. 
An  occasion  for  this  will  arise  when  the  rate  of  ex- 
change here  upon  a  foreign  country  is  much  higher 
or  lower  than  the  rate  between  another  country 
and  the  one  to  which  remittance  is  desired.  For 
illustration:  Suppose  a  New  York  banker  wishes 
to  remit  to  Paris  25,250  francs  and  the  best 
rate  quoted  is  5.17^  francs.  This  would  cost 
$4,879.23  as  is  shown  by  the  following  computation: 
25,250-5.175=14,879.23.  Jf  a  demand  draft  on  Lon- 
don can  be  bought  in  New  York  at  |4.84,  and  if  the 
cable  reports  London  quotations  for  checks  on 
Paris  at  25.25  francs  per  pound  sterling,  it  will  be 
found  that  for  £1,000  a  check  for  25,250  francs  can 
be  obtained  in  London  on  Paris  and  that  the  £1,000 
demand  draft  bought  in  New  York  on  London  at 
|4.84  would  cost  only  |4,840.  Thus  by  remitting  to 
Paris  through  London  there  would  be  a  saving  of 
the  difference  between  |4,840  and  $4,879.23,  or 
$39.23. 

The  shipment  of  gold  hence  to  Paris  in  Novem- 
ber,  1901,  which  was  made  necessary  by  the  demand 
to  remit  in  settlement  of  maturing  loans,  was  cov- 
ered or  reimbursed  through  sterling  at  Paris  on 
London,  the  process  being  arbitration  of  exchange, 
or  the  purchase  of  money  of  one  country  through 
another.    The  shippers  of  the  gold  could  not  profit- 


ARBITRATION  OF  EXCHANGE.  9B 

ably  export  the  metal  either  to  Paris  or  London 
and  obtain  reirabursemeut  through  direct  exchange 
for  the  reason  that  rates  for  sterling  at  New  York 
on  London  were  below  the  gold  exporting  point, 
and  francs  could  not  be  obtained  in  sufficient  vol- 
ume for  the  purpose  of  reimbursement.  At  the 
time  the  gold  was  being  shipped,  however, 
exchange  at  Paris  on  London  was  favorable  for 
arbitration  operations.  The  gold  was  sent  hence 
to  the  French  capital  and  the  reimbursing  bill  was 
drawn  upon  London.  Exchange  on  Paris  was  ob- 
tained by  the  drawee  of  the  bill  and  on  the  presen- 
tation of  the  draft  it  was  met  with  the  proceeds  of 
the  French  exchange  which  he  had  procured,  and 
the  transaction  was  closed  at  a  profit.  Thus  about 
$16,000,000  gold  was  forwarded  hence  to  Paris,  and 
the  shippers  were  reimbursed  through  the  process 
of  arbitration  of  exchange. 

In  conducting  such  operations  it  is  essential 
that  the  banker  shall  be  advised,  through  the 
cable,  of  the  varying  conditions  of  the  markets 
abroad.  In  such  markets  as  Paris  and  London, 
where  the  exchange  transactions  are  always  large, 
rates  often  fluctuate  sharply  and  conditions  change 
frequently.  Consequently  though  the  situation 
may  be  favorable  one  day  it  may  suddenly  become 
adverse,  necessitating  some  modification  of  the 
method  of  arbitration.  Moreover  it  frequently  hap- 
pens that  after  a  successful  negotiation  has  been 
effected  by  a  banker,  as  the  result  of  private  infor- 
mation, his  competitors  may  be  advised  of  the 
favorable  conditions  prevailing  and  they  also  may 
draw  in  a  similar  manner.  Hence  each  operator 
seeks  to  obtain  for  himself  alone  all  possible  inf or- 


96  FOREIGN  EXCHANGE. 

mation  regarding  changes  which  are  likely  to  affect 
his  business.  Sometimes  a  banker  may  find,  upon 
calculation,  that  it  will  be  profitable  to  conduct  ar- 
bitration of  exchange  between  three  or  more 
points;  in  such  cases  the  conditions  at  each  of  the 
points  must  first  be  ascertained  and  calculations 
have  to  be  made  with  the  utmost  care.  Occasion- 
ally in  drawing  bills  the  banker,  in  order  to  take 
advantage  of  arbitration  operations,  will  transfer 
credits,  through  the  cable,  from  an  adverse  centre 
to  a  point  favorable  for  his  purpose.  Indeed  there 
are  very  many  ways  by  which  arbitration  can  be 
profitably  conducted  by  bankers  haviiig  the  requi- 
site facilities  and  the  necessary  skill  for  such  oper- 
ations. 

Arbitration  of  exchange,  it  may  be  noted,  differs 
entirely  from  arbitrage  operations  in  securities. 
The  former  is  wholly  confined  to  what  may  be 
termed  manipulation  of  exchange  while  the  latter 
pertains  to  the  business  of  buying  or  selling, 
through  the  cable,  of  securities  on  the  foreign 
bourses  taking  advantage  of  the  market  fluctua- 
tions of  such  securities.  Thus  stocks  bought  in 
London  may  be  profitably  sold  in  New  York  or  the 
operation  may  be  reversed  should  conditions  be 
such  as  to  make  it  more  desirable.  Arbitrage  oper- 
ations are  conducted  almost  exclusively  by  stock 
houses  having  the  requisite  facilities  though  the 
foreign  bankers  often  effect  such  trades.  The  re- 
sults of  the  negotiations  influence  the  exchange 
market  only  when  there  has  been  an  excess  of  buy- 
ing or  of  selling  between  the  regular  European 
bourse  settlement  periods.  If  the  balance  should 
be  in  favor  of  New  York,  the  resulting  exchange 


ARBITRATION    OF    EXCHANGE.  97 

would  be  offered  on  the  market;  should  the  balance 
be  adversejbills  would  be  in  demand  for  remittance. 
It  will  be  observed  that  operations  in  arbitration 
of  exchange  require  the  services  of  men  of  the  larg- 
est experience,  and  hence  the  business  can  be  con- 
ducted to  advantage  only  in  the  most  thoroughly 
equipped  offices.  The  exchange  student  who  enjoys 
opportunities  for  practice  in  such  offices  and  has 
the  determination  to  qualify  himself  for  this 
branch  of  exchange  work  by  acquiring  a  knowledge 
of  all  of  its  intricate  details  will  have  no  difficulty 
after  such  qualification  in  securing  advancement. 
The  field  for  operations  in  arbitration  of  exchange 
is  continually  and  rapidly  broadening,  and  there 
will  probably  always  be  a  demand  for  the  services 
of  men  capable  of  taking  positions  as  managers  of 
exchange  houses  or  departments. 


CHAPTER  XVIII. 

SUGGESTIONS  FOR  EXCHANGE  STUDENTS— DESIR- 
ABILITY OF  OBTAINING  POSITIONS  WHERE  OP- 
PORTUNITY FOR  PRACTICAL  KNOWLEDGE  MAY 
BE  HAD— VERIFICATION  OF  EXCHANGE  CALCU- 
LATIONS USEFUL— THE  BASIS  FOR  COMPUTA- 
TIONS OF  FIXED  PARS  OF  EXCHANGE— HOW 
CLOSE  QUOTATIONS  ARE  FIGURED  IN  TRANSAC- 
TIONS IN  BILLS. 

The  reliance  upon  tables  in  working  foreign  ex- 
change calculations  has  become  necessary  owing  to 
the  fact  that  in  offices  where  the  business  is  large 
and  where  exchange  in  various  currencies  is  con- 
stantly handled  it  would  be  impossible  to  compute 
each  separate  item  in  the  time  required  for  the  des- 
patch of  the  day's  business  or  for  the  outgoing 
steamer.  Moreover  in  large  offices  the  drafts  which 
are  sent  in  by  local  exporters  or  are  received  by 
mail  for  sale  or  for  the  purpose  of  forwarding  for 
collection  have  to  be  carefully  examined  for  errors 
or  for  irregularity  in  execution,  and  this  requires 
the  supervision  of  clerks  of  experience,  whose  time 
must  be  devoted  to  this  work  to  the  exclusion  of 
the  computation  of  exchange  rates  or  of  other  de- 
tails. In  offices  where  drafts  are  bought  for  imme- 
diate sale  to  bankers  who  make  use  of  them  in  their 
business  the  same  care  is  required  to  see  that  the 
bills  are  properly  drawn  and  that  they  conform  in 


SUGGESTIONS  FOR  EXCHANGE  STUDENTS.   9d 

every  respect  to  the  requirements  of  bankers  in  for- 
eign countries.  It  will  be  observed,  therefore,  that 
in  houses  vrhere  an  active  exchange  business  is  con- 
ducted, there  is  a  vast  amount  of  detail  essential 
to  the  proper  management  of  the  office,  and  this 
part  of  the  work  is  fully  as  important  as  is  that  of 
the  computation  or  the  verification  of  exchange 
calculations. 

The  junior  bank  clerk,  who  has  had  experience  in 
the  domestic  exchange  department  or  in  other 
branches  of  an  institution  where  he  has  had  oppor- 
tunities for  obtaining  some  knowledge  of  the  first 
principles  of  foreign  exchange,  should,  if  he  is  desir- 
ous of  making  a  thorough  study  of  this  branch  of 
banking,  seek  to  secure  a  transfer  to  the  exchange 
department  of  his  bank  or  to  arrange  for  temporary 
employment  in  that  office,  or  to  obtain  admission 
to  some  other  well  conducted  establishment.  His 
familiarity  with  the  work  in  which  he  has  been 
engaged  will,  if  he  has  made  fair  progress  in  that 
branch  of  the  banking  business,  enable  him  quickly 
to  grasp  the  minor  details  of  his  new  work  and  dis- 
cover the  difference  in  the  methods  of  conducting 
transactions.  With  this  practical  experience  and 
close  attention  to  every  detail  he  should  soon  be- 
come qualified  for  a  subordinate  position  in  the  ex- 
change department.  This  may  not  be  so  remunera- 
tive as  was  the  position  from  which  he  was  trans- 
ferred, or  which  he  temporarily  or  permanently 
left,  but  he  should  be  willing  to  make  some  sacri- 
fices in  order  to  qualify  himself  for  employment  in 
a  field  where  promotion,  through  merit,  is  likely  to 
be  more  rapid  than  in  almost  any  other  branch  of  a 
banking  establishment.     If  he  has  made  a  good 


100  FOREIGN  BXCHANGB. 

selection  and  has  the  advantage  of  careful  and 
patient  training  by  a  competent  manager  he  will, 
even  if  his  early  education  has  been  deficient,  most 
likely  soon  secure  advancement. 

The  first  thing  to  be  done,  is  through  diligent 
study,  as  rapidly  as  possible,  to  perfect  himself  in 
neglected  branches.  With  a  definite  object  in  view, 
the  acquisition  of  a  thorough  and  practical  know- 
ledge of  the  exchange  business,  and  with  the  incen- 
tive of  probably  remunerative  and  permanent  em- 
ployment the  student  will  most  likely  make  quite 
satisfactory  progress.  Though  there  are  few  text 
books  on  exchange  there  are  in  the  libraries,  and 
easily  accessible,  works  on  German  and  French  and 
other  languages,  commercial  and  historical  geogra- 
phy, and  with  a  study  of  these  and  a  review  of  the 
lessons  in  arithmetic  and  conversion  of  currencies 
which  were  taught  him  while  at  school,  the  student 
should  soon  qualify  himself  for  his  new  work. 

His  attention  should  be  concentrated  upon  his 
new  curriculum  to  the  exclusion  of  all  else.  He 
should  avail  himself  of  every  opportunity  to  ac- 
quire knowledge  of  all  details  of  his  specialty  and 
to  this  end  he  should  closely  observe,  so  far  as  can 
properly  be  permitted,  the  work  in  progress  in 
other  hands.  Probably  the  most  effective  instruc- 
tion he  can  obtain  is  that  which  will  be  acquired 
through  the  verification  of  the  calculations  of  ex- 
change tables,  as  prepared  by  skilled  computists, 
and  upon  which  the  managers  of  exchange  depart- 
ments chiefiy  rely.  In  the  process  of  such  verifica- 
tion the  student  will  naturally  acquire  a  knowledge 
of  how  the  fixed  constant  or  the  basis  of  the  com- 
putation of  the  exchange  rate  is  obtained.    For  ex- 


SUGGESTIONS    FOR  EXCiTANGE  'SWDeM'S.     101 

ample  he  will  find  that  the  value  of  the  pound  ster- 
ling, or  the  Victoria  sovereign,  was  fixed  by  act  of 
Congress  passed  March  3,  1873,  at  $4.8665.  Unless 
the  student  should  seek  to  know  why  and  how  this 
valuation  was  established  he  will  be  likely  to  fall 
into  the  error  of  accepting  statements  as  facts 
without  endeavoring  to  verify  them.  The  above 
noted  valuation  of  the  pound  sterling  was  estab- 
lished as  a  basis  for  computing,  for  the  assessment 
of  customs  duties,  the  values  of  such  imported 
goods  as  were  stated  in  British  money.  The  valua- 
tion is  based  upon  the  weight  and  fineness  of  the 
gold  in  the  sovereign.  This  coin  contains  113.001.605 
Troy  grains  of  pure  gold.  The  United  States  dollar 
contains  23.22  Troy  grains  of  pure  metal.  By  divid- 
ing the  weight  of  the  pure  metal  in  the  sovereign 
by  the  weight  of  pure  gold  in  the  dollar — 23.22 
grains — the  result  is  |4.8665,  the  value  of  the  sov- 
ereign in  American  money. 

By  pursuing  the  inquiry  further  it  will  be  found 
that  the  number  of  grains  of  pure  gold  in  the  sov- 
ereign, as  above,  is  obtained  from  the  weight  of 
standard  gold  in  the  sovereign  which  is  123.274478 
Troy  grains.  The  British  standard  is  eleven- 
twelfths  fine;  hence  the  pure  gold  weighs  113.001- 
60476  Troy  grains  or  113.001.605  as  above.  This 
weight  and  fineness  of  the  coin  are  established  by 
an  act  of  Parliament  precisely  as  the  weight  and 
fineness  of  our  gold  dollar  are  fixed  by  law.  The  act 
of  Congress  passed  January  18,  1837,  changed  the 
fineness  of  the  gold  coin  to  nine-tenths,  preserving 
the  weight  of  the  standard  eagle  at  258  Troy  grains 
or  232.2  grains  of  pure  metal.  The  act  of  February 
12,  1873,  provided  for  the  continued  coinage  of  the 


102     ^  FOREIGN*  fiXdHANGB. 

gold  dollar,  without  changing  either  the  weight  or 
the  fineness;  hence  the  pure  gold  in  the  dollar 
weighs  23.22  Troy  grains.  As  this  is  the  intrinsic 
value  of  the  dollar  it  is  properly  made  the  divisor 
in  the  calculation  above  noted,  the  dividend  being 
the  intrinsic  value  of  the  British  sovereign  and  the 
quotient  is  the  value  in  American  money  of  such 
sovereign,  and  the  nominal  par  of  exchange  be- 
tween the  United  States  and  Great  Britain.  The 
value  of  the  English  shilling  in  American  money  is 
obtained  by  dividing  the  value  of  the  sovereign — 
$4.8665—  by  20,  the  number  of  shillings  in  the 
pound;  the  quotient  is  |.243325.  The  value  in  Ameri- 
can money  of  the  English  penny  is  obtained  either 
by  dividing  the  value  of  the  sovereign  by  240,  the 
number  of  pence  in  the  pound,  or  by  taking,  as  the 
divisor,  12,  the  number  of  pence  in  the  shilling,  and, 
as  the  dividend,  the  value,  in  cents  of  the  shilling; 
the  quotient,  in  either  case,  is  |.020277. 

The  course  of  exchange  is  influenced  by  supply 
and  demand,  time  cost  and  other  variable  factors 
and  rates  for  sight  exchange  move  more  or  less 
irregularly  between  what  are  known  as  gold  points, 
or  the  cost  of  transmitting  gold  in  lieu  of  exchange 
between  this  country  and  Europe.  Rates  for  sixty 
or  ninety  day  exchange,  known  as  bankers'  long 
bills,  are  largely  governed  by  the  ruling  rates  for 
discount  in  London  and,  sometimes,  by  the  rates  for 
money  in  New  York.  Rates  for  commercial  bills,  or 
those  drawn  against  commodities,  usually,  and 
especially  when  they  are  not  discountable,  rule  at 
the  lowest  figures.  The  quotations  for  these  vari- 
ous classes  of  drafts  for  each  fraction  between  the 
extreme  range  are  computed  in  the  tables  which 


SUGGESTIONS  FOR  EXCHANGE  STUDENTS.  103 

are  used  to  facilitate  the  working  out  of  exchange 
calculations.  In  buying  and  selling  drafts,  how- 
ever, the  use  of  smaller  fractions  or  decimals  of 
the  pound  often  become  necessary  in  order  to  close 
a  transaction,  and  in  such  cases  the  rate  is  named 
at  a  certain  price  less  one-eighth,  one  sixteenth, 
one  thirty-second  or  three  thirty-seconds  of  1  per 
cent.,  and  the  computation  is  made  upon  the  cur- 
rent price  of  the  bill.  For  example  one-eighth  of  1 
per  cent,  on  a  quotation  of  |4.87  is  |.0060875  deduct- 
ing which  leaves  the  price  $4.8639125;  less  one-six- 
teenth of  1  per  cent.,  or  |.00304375,  leaves  the  net 
14.86695625;  less  one  thirty-second  of  1  per  cent.,  or 
1.001521875,  leaves  the  net  $4.86478125  and  less 
three  thirty-seconds  of  1  per  cent.,  or  |.004565625, 
leaves  the  net  |4.865434375.  In  the  daily  work  of 
an  office  the  clerk  will  frequently  be  called  upon  to 
make  out  or  verify  such  computations;  hence  he 
should  seek  to  familiarize  himself  with  the  process 
of  divisions  by  fractions  and  be  careful,  through 
verifications  of  his  calculations,  to  avoid  errors. 


CHAPTER  XIX. 

COMPUTATIONS  OP  FRENCH  EXCHANGE— PECULIAR- 
ITY OF  THE  QUOTATIONS  FOR  FRANCS— SMALL 
SUPPLIES  OF  THIS  CLASS  OF  BILLS  IN  OUR  MAR- 
KET—ILLUSTRATIONS OF  INDIRECT  REMIT- 
TANCE TO  PARIS  THROUGH  LONDON. 

The  French  franc  is  the  chief  money  of  account 
in  France,  Belgium,  Finland,  Greece,  Italy,  Spain, 
Switzerland  and  Venezuela,  though  it  is  called  by 
different  names  in  countries  other  than  Belgium. 
The  United  States  Mint  valuation  of  the  franc  is 
19.3  cents.  The  coin  weighs  4.978128  Troy  grains, 
and  as  it  is  900  fine  the  pare  gold  contained  therein 
is  4.4803152  grains.  To  ascertain  the  equivalent 
value  of  the  franc  in  American  money  the  weight  of 
pure  gold  in  the  coin  is  divided  by  the  weight  of 
pure  gold  in  the  United  States  dollar  and  the  result 
is  19.295+  cents  or,  as  stated  by  the  Director  of  our 
Mint,  19.3  cents.  The  number  of  francs  and  cen- 
times contained  in  the  dollar  is  ascertained  by  di- 
viding |1  by  19.295  cents,  as  above;  the  quotient  is 
o  francs  1827  centimes.  By  taking  19.3  cents  as  the 
divisor,  however,  the  quotient  is  5  francs  18134+ 
centimes,  which,  stated  as  5.18|,  is  the  par  of  ex- 
change between  this  country  and  France.  The  par 
between  France  and  Great  Britain  is  25  francs  2215 
centimes.     This  value  is  obtained  by  dividing  the 


COMPUTATIONS  OF  FRE3NCH  EXCHANGE.       105 

number  of  Troy  grains  of  pure  gold  in  the  pound 
sterling,  or  113.001605,  by  the  number  of  grains  of 
such  gold  in  the  franc,  or  4.4803152;  the  quotient  is 
25  francs  22J5+  centimes. 

Francs  are  quoted  in  the  United  States  by  the 
number  of  francs  and  centimes  to  the  dollar — thus 
5.18J  to  5.17^ — the  first  being  the  bid  and  the  last 
the  asking  price.  The  reason  for  this  method  of 
quotation,  which,  it  may  be  noted,  is  the  reverse  of 
that  in  other  kinds  of  exchange,  is  that  at  the  ap- 
parently higher  rate,  5.18^  the  bill  would  cost  less 
than  at  the  apparently  lower  rate.  This  is  illus- 
trated by  H.  K.  Brooks,  in  his  work  on  foreign  ex- 
change, by  the  following:  |5,000  at  5.15  would 
give  25,750  francs,  while  this  number  of  francs — 
25,750— at  5.20  would  only  cost  |4,951.92.  There  is 
another  peculiarity  about  quotations  for  francs  and 
that  is  that  the  difference  between  the  bid  and  the 
asking  price  is  f  of  a  centime,  as  is  shown  above  in 
the  quotation  of  5.18^  to  5.1TJ.  The  reason  assigned 
by  Mr.  Brooks  is  that  f  of  a  centime  is  equivalent 
to  one-eighth  of  1  per  cent,  in  the  pound  sterling, 
and  because  most  of  the  French  exchange  was  for- 
merly covered  or  paid  through  English  exchange, 
this  method  served  as  a  convenience  in  figuring. 
Another  explanation  is  that  as  there  are  five  francs 
to  the  dollar,  one-eighth  of  1  per  cent,  on  one  franc 
would  call  for  five-eighths  of  1  per  cent,  on  five 
francs. 

Ordinarily,  and  almost  always  in  transactions  for 
small  amounts  of  francs,  this  difference  of  f  of  a 
centime  is  the  smallest.  In  large  sums,  however, 
and  where  there  is  active  competition,  necessitat- 
ing closer  quotations,  this  fraction  is  divided  by  six- 


166  FOREIGN    EXCHANGE. 

teenths,  and  thirty-seconds,  and  these  fractions  are 
quoted  as  plus  or  minus,  though  most  frequently  as 
minus.  The  fraction  of  one-sixteenth,  for  example, 
when  quoted  as  minus,  or  less,  means  that  it  is  one- 
sixteenth  of  1  per  cent,  of  the  quoted  price  of  the 
franc.  But  the  fraction  must  be  added  to  the  price, 
for  the  reason  above  noted,  when  it  is  desired  to  de- 
mand more  for  the  franc.  Thus:  In  the  quotation 
of  5.18J  less  one-sixteenth  to  5.17^  the  result,  deci- 
mally stated,  is  5.18448828125  to  5.1750.  Less  one 
thirty-second  the  result  is  5.182869140625  to  5.1750. 
Less  three  thirty-seconds  it  is  5.186107421875  to 
5.1750. 

The  course  of  French  exchange,  in  the  New  York 
market,  is  within  comparatively  narrow  limits. 
One  reason  is  that  the  volume  of  such  exchange  is 
small  and  usually  only  sufficient  for  the  purpose  of 
direct  mercantile  remittance.  The  facilities  offered 
by  the  cables  for  keeping  closely  in  touch  with  the 
Paris  market  and  the  activity  in  exchange  at  Paris 
on  London  enable  those  of  our  bankers  who  are 
remitting  to  France  to  resort  to  indirect  or  circui- 
tous exchange  operations,  drawing  on  London  and 
covering  with  French  exchange,  and  thus  they 
sometimes  obtain  greater  advantage  than  they 
could  by  direct  remittance.  The  range  in  the  New 
York  market  for  bills  on  France  during  1901  was 
between  the  gold  export  point  of  about  5.15f,  less 
one-sixteenth,  and  5.20.  Though  the  movement  of 
gold  hence  to  Paris  was  unusually  large  in  that 
year,  very  little  if,  indeed,  any  of  the  metal  was 
covered  with  francs  drawn  in  New  York,  the  reim- 
bursing drafts  being  made  upon  London  where  they 
were  covered  with  French  exchange  in  that  market, 


COMPUTATIONS  OF  FRENCH  EXCHANGE.   107 

Still  another  reason  for  the  comparatively  small 
transactions  in  francs  in  New  York  is  that  the  prin- 
cipal bankers  in  this  city  have  correspondents  in 
London  who  have  houses  or  other  connections  in 
Paris,  through  whom  they  make  settlements,  and 
these  adjustments  are  effected  at  a  more  satisfac- 
tory profit  than  would  be  possible  with  negotia- 
tions directly  between  New  York  and  Paris. 

A  convenient  method  for  determining  the  possi- 
ble profit  of  remitting  to  Paris  by  the  way  of  Lon- 
don, is  by  multiplying  the  rate  of  exchange  at  Paris 
on  London,  as  reported  by  the  cable,  by  the  value 
of  a  franc  in  American  money.  The  result  of  the 
computation  will  show  the  profit  or  loss  in  making 
the  draft.  The  calculation  is  illustrated  by  the  fol- 
lowing: Exchange  at  Paris  on  London  25.145x19.3, 
the  value  of  a  franc=|4.852985.  Add  ^  of  1  per  cent, 
time  cost  in  transit  and  for  stamps  and  commis- 
sions=$4.85905.  With  sight  sterling  at  |4.86  there 
would  be  a  slight  advantage  in  indirect  remittance, 
and  this  profit  would  be  augmented  by  a  lower  rate 
for  French  exchange.  A  decline  in  such  rate  to 
25.10  would  make  the  price  of  the  bill  |4.850365, 
giving  a  greater  profit  with  sterling  exchange  at 
$4.86.  It  may  be  noted  that  in  transactions  in  francs 
between  Paris  and  London  the  smaller  price  repre- 
sents the  lower  and  the  greater  price  the  higher 
rate. 

It  will  be  observed  that  in  the  computations  of 
the  par  of  French  exchange  and  of  the  price  of  such 
exchange,  less  the  smaller  fractions  given  above, 
the  calculations  have  been  carried  to  the  farthest 
decimal.  This  has  by  no  means  been  done  with  a 
view  to  the  discouragement  of  the  student  of  ex- 


!108  FOREIGN   EXCHANGE, 

change,  but  for  the  purpose  of  his  instruction  and 

also  of  as  accurately  as  possible  giving  the  results 
r  of  the  computations,  some  of  which,  especially 
I     where  large  amounts  are  involved,  may  be  useful. 

In  practice  the  valuation  of  the  franc,  as  stated  by 
,  the  Director  of  the  United  States  Mint— 19.3— will 
I  serve  ordinary  purposes.  So  also  will  an  abridge- 
I  ment  to  three  decimals  of  a  centime  of  the  results 
I  of  the  computations  for  the  price  of  the  franc  less 
I  one-sixteenth,  one  thirty-second  and  three  thirty- 
1  seconds,  be  sufficiently  accurate.  In  the  tables  con- 
I  tained  in  Mr.  H.  K.  Brooks'  work  on  exchange,  the 
I  computations  for  all  kinds  of  bills  have  been  made 
I  for  amounts  up  to  |1 00,000  on  francs  and  the  neces- 
I;  sary  decimals  are  given.  The  author  of  this  publi- 
1    cation  has  also  computed  the  smallest  fractions  of 

the  franc  in  common  use  with  a  view  to  facilitating 

the  work  of  an  office.  Still,  as  has  heretofore  been 
I  suggested,  the  student  should  familiarize  himself, 
U  by  verifying  the  computations,  using  the  processes 
|:    given  instead  of  relying  wholly  upon  the  tables. 


CHAPTER  XX. 

GERMAN  EXCHANGE  COMPUTATIONS— METHODS  OF 
QUOTING  REICHSMARKS— ARBITRATION  OPERA- 
TIONS THROUGH  LONDON— THE  CALCULATIONS 
IN  BROOKS'S  TABLES  COMMENDED. 

The  monetary  unit  in  the  German  Empire  is  the 
reiehsmark,  or,  as  it  is  commonly  called,  the  mark. 
Its  value  in  United  States  currency,  as  periodically 
proclaimed  by  the  Director  of  the  Mint,  is  .238 
cents.  This  valuation  is  computed,  as  in  the  case 
of  other  foreign  gold  monetary  units,  by  dividing 
the  weight  of  the  pure  gold  in  the  mark  by  the 
weight  of  pure  metal  in  the  dollar.  The  mark 
weighs  6.1458  Troy  grains  and  the  fineness  is  nine- 
tenths;  hence  the  weight  of  the  pure  gold  is  5.53122 
grains.  The  pure  metal  in  the  dollar  weighs  23.22 
grains.  Taking  the  latter  as  the  divisor  and  the 
weight  of  the  pure  gold  in  the  mark  as  the  dividend 
the  quotient  is  .2382+  cents.  The  United  States 
Mint  valuation  of  .238  cents  is,  however,  accepted 
as  the  par  of  exchange  between  this  country  and 
Germany,  as  .193  cents  is  so  accepted  between  the 
United  States  and  France  and  |4.8665  between  this 
country  and  Great  Britain. 

In  the  majority  of  exchange  transactions  be- 
tween Germany  and  the  United  States  it  is  the  cus- 
tom of  bankers,  instead  of  quoting  the  single  mark, 
to  quote  the  equivalent  of  four  marks  to  the  dollar, 


110  FOREIGN   EXCHANGE. 

or  .952  cents.  In  smaller  transactions,  however, 
and  in  cities  other  than  the  principal  centres  the 
exchange  rate  named  is  for  the  single  mark  or 
.2385  cents.  The  fractional  quotations,  on  the  basis 
of  four  marks  to  the  dollar,  are  by  eighths,  six- 
teenths and  thirty-seconds,  either  plus  or  minus 
these  fractions  as  occasion  may  require.  In  calcu- 
lating: marks  quoted  in  this  manner  the  quotation 
must  first  be  divided  by  4,  to  &et  the  rate  for  one 
mark.  The  quotient  is  then  used  as  a  divisor  and 
the  amount  to  be  invested  in  the  exchange  is  taken 
as  the  dividend;  the  quotient  is  the  number  of 
marks  and  pfennige  required.  In  computing  the 
amount  of  American  money  which  will  be  needed 
to  buy  a  stated  number  of  marks  and  pfennige  the 
quotation  for  four  marks  is  first  converted  into 
that  for  a  single  mark.  This  is  multiplied  by  the 
stated  number  of  marks  and  pfennige  and  the  re- 
sult is  the  sum  of  money  required  for  their  pur- 
chase. The  process  of  computation  on  the  basis  of 
a  quotation  for  a  single  mark  is  the  same  with  the 
exception  that  the  conversion  from  four  marks  to 
the  single  mark  is  unnecessary.  Examples  of  these 
processes  are  clearly  worked  out  in  Brooks'  For- 
eign Exchange.  This  publication  also  has  tables 
of  computations  of  rates  for  German  exchange  at 
the  smallest  fractions,  in  use  as  above  noted. 

The  par  of  German  exchange  between  Germany 
and  Great  Britain  is  20  marks  43  pfennige.  This 
par  is  calculated  by  taking  as  the  divisor  the  num- 
ber of  Troy  grains  of  pure  gold  in  the  mark  as 
above,  and  as  the  dividend  the  number  of  such 
grains  in  the  English  sovereign — 113.001605 — the 
quotient  is  20  marks  429+  pfennige,  or,  as  is  deci- 


GERMAN  EXCHANGE  COMPUTATIONS.    Ill 

mally  stated,  20.43  marks.  While  sterling  at  Ber- 
lin on  London,  represented  by  the  above  rate,  does 
not  ordinarily  sharply  change,  sometimes  the  fluc- 
tuations are  such  as  to  be  significant  of  important 
financial  movements  at  the  German  capital  and, 
therefore,  the  Berlin  rate  on  London  is  more  or  less 
closely  watched  by  our  foreign  exchange  houses,  in 
order  to  take  advantage  of  conditions  favorable  to 
arbitration  in  exchange  or  other  operations.  The 
gold  points  for  exchange  at  Berlin  on  London  are 
20.52  marks  for  export  to  and  about  20.34  marks  for 
import  from  London,  and  movements  of  the  rate 
toward  either  points  often  have  a  direct  influence 
upon  monetary  conditions  at  the  British  capital 
and  indirectly  upon  New  York  exchange  on  London 
and  on  Germany. 

Exchange  on  Germany,  as  indeed  is  the  case  on 
the  other  chief  continental  countries,  is  drawn  with 
cables,  banker's  short  and  long  bills  and  commer- 
cial drafts.  The  volume  of  banker's  exchange  is  not 
large  and  it  is  ordinarily  only  sufficient  for  direct 
remittance.  Most  of  the  banker's  business  be- 
tween New  York  and  Berlin  is  conducted  through 
London,  though  some  of  our  most  important  ex- 
change houses  have,  among  their  correspondents, 
the  principal  banking  establishments  in  the  Ger- 
man capital  with  which  they  directly  transact  their 
business,  usually  maintaining  and  employing  large 
credits  and  negotiating  loans  advantageously. 

The  tables  in  Brooks'  work  on  exchange  give 
rates  for  four  marks  from  93  to  97  7-16,  with  the 
smallest  fractions,  and  also  rates  for  single  marks 
from  23  to  .2495  cents;  computations  for  each 
method  of  quotation  are  carried  out  in  exact  deci- 


112  FOREIGN    EXCHANGE. 

mals.  The  computations  are  also  made  for  the  con- 
version of  marks  into  dollars,  francs  and  into  ster- 
ling and  of  dollars,  sterling  and  francs  into  marks. 
Indeed  every  possible  calculation  which  may  be  re- 
quired for  the  working  of  German  exchange  seems 
to  be  supplied  by  this  publication.  Among  the 
valuable  tables  contained  in  this  book  is  one  giving 
the  cardinal  numbers  and  commercial  terms  in  the 
German  and  in  nine  other  languages.  This  will  be 
of  great  assistance  to  those  students  of  exchange 
who  may  be  deficient  in  foreign  languages. 


CHAPTER  XXL 

MONETARY  UNITS,  SYSTEMS  AND  PARS  OF  EX- 
CHANGE OF  VARIOUS  CONTINENTAL  AND  ASI- 
ATIC COUNTRIES— THE  BASIS  ON  WHICH  PARS 
ARE  COMPUTED. 

Though  our  commercial  transactions  with  Euro- 
pean nations,  other  than  Great  Britain,  France  and 
Germany,  are  settled  chiefly  with  drafts  through 
London,  bills  for  direct  operations  between  the 
United  States  and  these  countries  are  often  drawn 
and  sometimes  exchange  conditions  at  such  points 
may  be  favorable  for  profitable  arbitration.  It 
would  seem  desirable,  therefore,  that  the  student 
should  seek  to  familiarize  himself  with  the  methods 
of  ascertaining  the  equivalents  in  American  cur- 
rency of  the  monetary  units  and  also  with  the  mone- 
tary systems  of  these  countries. 

In  1892  Austro-Hungary  replaced  the  silver 
standard  by  that  of  gold,  and  since  then  the  crown, 
or  kronen,  has  been  the  monetary  unit.  The  United 
States  Mint  value  of  this  unit,  and  hence  the  par  of 
exchange,  is  stated  at  .203  cents.  The  standard 
weight  is  5.2277616  Troy  grains,  the  fineness  is  nine- 
tenths  and  the  pure  gold  represented  in  the  unit  is 
4.70498544  Troy  grains.  This  weight  of  pure  metal 
divided  by  23.22  grains  of  pure  gold  in  the  dollar 
gives  .202626,  or  as  stated  by  the  mint  authority, 
'  as  above,  .203  cents.    Brooks  has  tables  for  the  con- 


114  FOREIGN   EXCHANGE. 

version  of  the  crown  and  the  heller — 100  of  which 
are  equal  to  a  crown — into  American  currency  and 
vice  versa.  The  gold  coins  are  the  quadruple  ducat, 
double  ducat,  the  ducat,  sovereign,  half  sovereign, 
and  multiples  of  the  crown  and  of  the  florin. 

The  unit  of  the  Scandinavian  monetary  system  is 
also  the  crown  or  kroner.  The  valuation  of  this 
unit  as  fixed  by  the  Director  of  the  United  States 
Mint  is  .268  cents.  The  standard  weight  of  the  unit 
is  6.9141  troy  grains,  the  fineness  is  nine-tenths, 
and  hence  the  pure  gold  weighs  6.22269  Troy  grains. 
This  weight  divided  by  the  23.22  grains  of  pure 
metal  in  the  American  dollar  gives  .268  cents.  Den- 
mark, Norway  and  Sweden  are  embraced  in  the 
Scandinavian  system.  We  again  refer  to  Brooks' 
tables  for  the  conversion  of  the  kroner  and  the 
ores — one-hundredth  of  a  kroner — into  American 
money.  It  may  be  noted  that  the  Scandinavian 
monetary  union  was  formed  in  1873  when  the  silver 
standard  of  the  above  named  countries  was  replac- 
ed by  that  of  gold  on  the  basis  of  the  krone. 

The  monetary  unit  of  Russia  is  the  rouble,  or 
ruble,  the  United  States  Mint  valuation  of  which 
is  .515  cents,  though  until  1897,  when,  by  Imperial 
ukase,  the  equivalent  of  one  and  a  half  paper  rubles 
was  made  one  gold  ruble,  the  valuation  was  .772. 
The  standard  weight  of  the  unit  is  13.273894  Troy 
grains,  the  fineness  is  nine-tenths  and  the  pure  gold 
contained  therein  is  11.9465046  Troy  grains.  Tak- 
ing this  weight  as  the  dividend  and  23.22  grains  of 
pure  metal  in  the  dollar  as  the  divisor  the  quotient 
is  .511449  or,  as  above  stated  .515.  The  gold  coins 
are  of  ten  and  five  rubles.  Imperials  and  half  Impe- 
rials, and  the  minor  coins  are  copecks  or  kopecks, 


I 


MONETARY  UNITS  AND  SYSTEMS.  116 


one  hundred  of  which  equal  one  ruble.  Brooks' 
tables  have  rates  in  American  currency  for  ex- 
change drawn  in  rubles  and  kopecks. 

The  Latin  Union  was  formed  in  1865  between 
France,  Belgium,  Switzerland  and  Italy  with  the 
object  of  establishing  the  coinage  ratio  on  the  basis 
of  one  of  gold  to  fifteen  and  a  half  of  silver.  In  1868 
Greece  was  admitted,  though  the  universal  intro- 
duction of  the  French  monetary  system  into  the 
country  was  not  effected  until  1883.  In  1868  Spain 
adopted  the  French  system  with  the  peseta,  or 
franc,  as  the  unit ;  the  coinage  of  gold  Alphonses  of 
twenty-five  pesetas  did  not  begin  until  1876.  The 
monetary  unit  of  Finland  was  established  in  1877 
on  the  basis  of  the  finmark  or  franc.  The  units  of 
France,  Belgium  and  Switzerland  are  francs  of 
.193  cents,  of  Finland,  the  finmark,  of  Greece,  the 
drachma,  of  Italy,  the  lira  and  of  Spain  the  peseta, 
all  of  the  same  valuation  in  American  currency  of 
.193  cents,  as  established  by  the  Director  of  the 
United  States  mint.  The  weight  of  the  pure  gold 
in  the  French  franc — 4.4803152  Troy  grains — is  also 
the  weight  of  the  metal  in  the  monetary  units  of 
Roumania,  Bulgaria  and  Servia  in  Europe,  of  the 
Argentine  Republic,  Venezuela,  the  United  States 
of  Colombia,  Ecuador,  Peru,  Bolivia  and  Paraguay 
in  South  America,  and  of  Costa  Rica,  Nicaragua, 
Honduras,  Salvador  and  Guatemala  in  Central 
America,  though  the  units  are  called  by  different 
names.  Therefore,  .193  cents  is  the  value  of  the 
unit  and  the  par  of  exchange  between  the  United 
States  and  these  countries,  thus  greatly  simplify- 
ing exchange  operations.  Bills  on  South  American 
*  countries  are  usually  drawn  in  the  United  States 


lie  FOREIGN   BXOHANGB. 

dollars,  and  on  Central  American  states  in  United 
States  and  in  Mexican  dollars. 

The  monetary  unit  of  Holland,  or  the  Nether- 
lands, is  the  gulden  or  florin,  the  pure  gold  repre- 
sented in  which  weighs  9.333489  Troy  grains.  Divid- 
ing this  weight  by  the  23.22  Troy  grains  of  pure 
metal  in  the  dollar  gives  .4019  cents  or,  as  stated  by 
the  Director  of  the  United  States  Mint,  .402  cents, 
which  is  the  par  of  exchange  between  this  country 
and  Holland.  The  gold  coins  are  ten  and  five  gul- 
den, ducats  and  double  ducats  and  the  silver  coins 
are  the  Rix  Daler,  two  and  a  half,  one  gulden  and 
one-half  gulden;  minor  coins  are  cents,  one  hundred 
being  equal  to  one  gulden  or  guilder. 

The  unit  of  Portugal's  monetary  system  is  the 
milreis  which  contains  25.088524  Troy  grains  of  pure 
gold.  Brazil  also  has  the  milreis  as  its  unit,  though 
the  value  is  only  about  one-half  that  of  Portugal. 
The  United  States  mint  valuation  of  the  Portugese 
unit  is  |1.080,  which  result  is  obtained  by  dividing 
the  weight  of  the  pure  gold  in  the  milreis  by  23.22, 
the  weight  of  the  pure  metal  in  the  dollar.  The 
gold  coins  of  Portugal  are  ten  milreis,  or  coroa,  five 
milreis  or  half  coroa,  two  and  one  milreis.  One 
thousand  reis  equal  one  milreis.  Brazilian  milreis 
have  a  value  of  .546  cents  and  the  coins  are  twenty, 
ten  and  five  milreis. 

The  monetary  unit  of  Turkey  is  the  piastre,  the 
United  States  Mint  valuation  of  w^hich  is  .044  cents. 
The  pure  gold  represented  in  the  unit  weighs 
1.020799  Troy  grains.  Dividing  this  weight  by  the 
23.22  grains  of  pure  metal  in  the  dollar  gives 
.043962  cents  or  .044  as  above  stated.  The  Turkish 
pound  of  medjidie  of  100  piastres  has  a  valuation  of 


xMONETARY  UNITS  AND  SYSTEMS.  117 

H4.3962.  Other  gold  coins  are  five  hundred  piastres, 
f^2l.98,  two  hundred  and  fifty,  fifty  and  twenty-five 
piastres. 

The  unit  of  the  Egyptian  monetary  system  is  the 
pound,  of  one  hundred  piastres,  which  is  valued  by 
the  Director  of  the  United  States  Mint  at  |4.943. 
The  pure  gold  in  the  unit  weighs  114.778088  Troy 
grains.  Taking  this  weight  as  the  dividend  and  the 
23.22  Troy  grains  of  pure  metal  in  the  dollar  as  the 
divisor,  the  quotient  is  |4.9480.  The  gold  coins  are 
the  pound,  half  pound,  and  twenty,  ten  and  five 
piastres.  It  will  be  observed  that  the  pure  gold  in 
the  Turkish  pound  weighs  10.921705  Troy  grains 
ess,  and  that  the  pure  metal  in  the  Egyptian  pound 
weighs  1.776483  grains  more  than  the  pure  gold  con- 
tained in  the  British  pound. 

The  Asiatic  countries,  with  the  exception  of 
India,  China,  Japan  and  Persia,  practically  have  no 
monetary  systems  and  no  gold  currency.  The  money 
of  account  of  these  countries  is  silver  or  baser 
metal,  and  the  variable  value  of  the  former  requires 
constant  revision  of  computations  of  exchange  quo- 
tations between  these  and  the  gold  standard  coun- 
tries of  the  rest  of  the  world.  Generally  speaking, 
all  settlements  are  effected  with  exchange  on  Lon- 
don or  on  the  European  continental  centres.  It  is 
expected,  however,  that  when  International  banks 
shall  be  established  in  the  Orient  exchange  in  dol- 
lars will  be  drawn  instead  of  in  British  sterling. 

British  India  has  as  the  monetary  unit  the  rupee 
which,  however,  is  the  money  of  account,  and  it  is 
current  at  15  rupees  to  the  British  sovereign,  which 
coin  is  the  standard  in  India.  The  latest  United 
States  Mint  valuation  of  the  rupee  is  .324  cents,  and 


118  FOREIGN   EXCHANGE. 

this  value  is  determined  by  consular  certificate. 
The  Indian  gold  coins  are  the  mohur  of  fifteen  ru- 
pees, $7.10;  ten  rupees,  |4.72;  five  rupees,  |2.36,  and 
the  double  mohur,  |14.20. 

China  has  a  currency  of  silver  represented  by  the 
tael,  the  value  of  which  varies  according  to  the 
locality  and  also  according  to  the  price  of  silver  in 
the  London  market.  Mexican  dollars  constitute 
the  principal  silver  circulating  medium;  most  of 
these  are  chopped  or  stamped  by  local  merchants  or 
governors.  The  United  States  Mint  valuation  of 
the  tael  ranges  from  .632  cents  at  Shanghai  to  .696 
cents  at  Taku.  In  fixing  the  valuation  of  the  Haik- 
wan  tael  for  the  purpose  of  adjusting  payments  of 
the  Chinese  indemnity  the  Plenipotentiaries  made 
the  equivalent  in  American  dollars  .742  cents. 

The  monetary  unit  of  Japan  is  the  yen,  the  United 
States  Mint  valuation  of  which  is  .498  cents.  Until 
1898,  however,  it  was  .997  cents ;  then  the  weight  of 
the  pure  gold  contained  in  the  yen  was  reduced  to 
11.574266  Troy  grains,  lowering  the  value  of  the 
unit  about  one-half. 

The  African  states  and  colonies,  except  Tunis 
and  Zanzibar,  have  no  independent  monetary  sys- 
tems and  exchange  transactions  are  either  in  Bri- 
tish sterling  or  francs  or  marks,  or  United  States 
dollars.  The  old  monetary  unit  in  Tunis  was  the 
piaster;  it  is  now  the  franc.  Zanzibar  has  as  the 
unit  a  dollar  of  .984  cents.  Australia  has  as  the 
unit  the  pound  sterling.  The  gold  coins  are  the  sov- 
ereign, Australia  half  sovereign,  five  guinea,  two 
and  one  guinea  and  half  and  quarter  guineas. 


I 


CHAPTER  XXII. 

THE  TRANSATLANTIC  CABLE  AND  EXCHANGE  OPER- 
ATIONS—EVERY COMMERCIAL  CENTRE  OF  THE 
WORLD  NOW  IN  TELEGRAPHIC  COMMUNICATION 
—ARBITRAGE  AND  ARBITRATION  TRANSAC- 
TIONS FACILITATED-THE  ELEMENT  OF  CHANCE 
ENTIRELY  ELIMINATED— CABLE  TOLLS  REDUC- 
ED TO  A  MINIMUM— CABLE  TRANSFERS  OF  GOLD 
—HOW  THE  PHILIPPINE  INDEMNITY  WAS  PAID. 

A  most  marvelous  reA^olution  in  the  methods  of 
operating  in  foreign  exchange  was  wrought  by  the 
Atlantic  cable.  This  medium  of  instantaneous 
transmission  was  applied  to  commercial  and  to  ex- 
change uses  almost  immediately  after  the  comple- 
tion in  1866  of  the  line  of  communication  between 
Trinity  Bay,  Newfoundland,  and  Valentia  Bay,  Ire- 
land. This  enterprise  was  so  successful  that  it 
(  ncouraged  the  laying  of  other  transatlantic  cables 
and  also  of  similar  means  of  communication,  wher- 
ever practicable  throughout  the  world,  and  now 
there  are  in  active  operation  submarine  cables  to 
the  number  of  318,  varying  in  length  from  14  to 
17,359  miles,  and  aggregating  146,419  miles.  In  ad- 
dition there  are  1,142  cables  of  an  aggregate  length 
of  19,880  miles,  which  are  owned  by  various  govern- 
ments, Great  Britain  alone  having  246  cables  of  a 
length  of  3,908  miles. 
'  {n  1866  our  international  commerce  amounted  to 


120  FOREIGN  EXCHANGE. 

1652,232,289,  growing  the  next  decade  to  |728,959,- 
053,  in  1886  to  1898,911,504,  in  1896  to  |1,091,682,874, 
and  it  is  now  about  two  and  a  half  billions  of  dol- 
lars annually.  The  enormous  increase  in  our  inter- 
national trade  indicated  by  these  statistics  is  un- 
questionably largely  if  not  almost  entirely  due  to 
the  facilities  for  constant  and  instantaneous  com- 
munication afforded  by  the  submarine  telegraph 
lines  which,  with  the  connecting  land  lines,  unite 
every  commercial  centre  of  the  world.  Though  bills 
of  exchange  are  drawn  in  almost  the  same  manner 
now  as  they  were  before  the  installation  of  cable 
lines,  the  banker  now  operates  in  such  bills  much 
more  effectively  because  of  the  information  which 
he  obtains  through  the  cable  of  tlie  actual  condi- 
tions of  the  market  abroad  in  which  his  operations 
are  conducted.  Before  cable  communication  was 
established  mail  advices  had  to  be  awaited,  and  the 
most  frequent  of  these  was  not  of tener  than  twice 
a  week.  Consequently  there  was  an  element  of 
chance  aff'ecting  the  banker's  calculations  which, 
though  generally  resulting  to  his  advantage,  was 
likely  at  times  to  prove  more  or  less  disastrous,  for 
there  was  always  a  possibility  of  the  occurrence  of 
some  unforseen  event  in  the  interval  between  the 
departure  of  the  steamers,  which  would  entirely 
derange  all  calculations.  Hence  exchange  opera- 
tions were  required  to  be  conducted  with  the  ut- 
most caution  to  avoid  possible  loss,  and,  neces- 
sarily, dealings  in  exchange  were  more  or  less  re- 
stricted in  volume. 

Instantaneous  and  accurate  cable  reports 
brought  all  the  markets  of  Europe  within  touch, 
and  as  these  cable  lines  were  extended,  the  markets 


TRANS-ATLANTIC  CABLES  AND  EXCHANGE.     121 

the  entire  commercial  world  into  closer  commu- 
nication.    The  merchant  was  kept  constantly  ad- 
vised of  the  fluctuations  in  prices  of  the  goods  in 
'  which  he  dealt ;  the  banker  was  apprised  of  mone- 
tary and  also  of  political  or  other  changes  which, 
in  a  greater  or  less  degree,  affected  the  financial 
situation;  he  was  enabled  to  employ  his  balances 
to  the  greatest  possible  advantage  by  diverting, 
through  cable  orders,  from  one  point  to  another 
money  or  securities  awaiting  profitable  investment, 
and  he  could  calculate  with  the  utmost  exactness 
the  cost  of  the  exchange  in  which  he  operated.  The 
European   stock  bourses   were   likewise   brought, 
I  through  the  cable,  into  close  communication  with 
j  our  own  stock  market.  Trading  in  American  securi- 
j  ties,  which  had  previously  been  restricted  to  invest- 
I  ments,  assumed  a  speculative  form.    Though  there 
was  an  important  difference  in  time  between  Lon- 
don and  New  York,  operations  at  the  former  centre 
could  be  conducted  for  at  least  a  portion  of  the  day 
almost  simultaneously  in  the  two  markets,  orders 
to  buy  in  one  being  executed  in  the  other,  through 
arbitrage    operations,    with    remarkable    celerity. 
Thus  w^ere  speculative  transactions  vastly  broad- 
ened, and  the  security  markets  of  Europe  opened, 
resulting  to  the  direct  advantage  of  commission 
houses  and  of  the  foreign  bankers  who  engaged  in 
this  branch  of  business.  Moreover,  the  entire  elimi- 
nation of  the  element  of  chance  in  all  transactions 
in  which  the  cable  was  employed  enabled  them  to 
be  conducted  with  almost  the  certainty  of  success. 
The  construction  of  cable  codes  has  reduced  to  a 
minimum  the  cost  of  messages,  and  thus  cable  com- 
munication has  been  brought  into  almost  constant 


122  FOREIGN  EXCHANGE. 

use,  as  is  indicated  by  the  estimate  that  more  than 
six  millions  of  messages  are  transmitted  annually. 
Competition  of  cable  lines,  through  new  construc- 
tion, has  decreased  the  tolls  from  |5  per  word, 
which  was  the  tariff  on  the  original  transatlantic 
line,  to  twenty-five  cents  per  word,  thus  placing 
cable  communication  within  the  reach  of  all  corres- 
pondents. The  perfection  of  the  system  of  operat- 
ing has  lessened  the  time  occupied  in  transmission 
from  eight  words  per  minute  originally  to  fifty 
words.  This  saving  of  time  through  rapidity  of 
transmission  is  often  of  the  utmost  importance  to 
remitters,  who  are  thereby  enabled  to  defer  almost 
until  the  last  moment  settlements  which  they  are 
required  to  make  in  order  to  meet  their  contracts. 
One  branch  of  the  banker's  business,  that  of 
transferring  gold  between  far  distant  points,  has 
been  brought  to  great  perfection  through  the  cable. 
An  interesting  illustration  of  this  movement  was 
given  in  1900,  when  conditions  prevailed  which  re- 
quired the  import  of  gold  from  abroad  in  such  a 
manner  as  to  cause  the  least  possible  disturbance 
to  the  European  financial  centres.  A  consignment 
of  an  important  amount  of  gold  was  about  to  be 
forwarded  from  India  to  London  for  the  account  of 
the  Bank  of  England.  A  New  York  banking  house 
being  advised  of  this  fact,  successfully  negotiated, 
through  the  cable,  for  the  purchase  of  the  metal, 
which  was  in  British  bars.  While  the  gold  was  in 
transit  arrangements  were  made  with  the  Bank  of 
England  for  the  exchange  of  the  gold  on  its  arrival 
in  London  for  American  bars.  The  exchange  was 
accordingly  made  and  the  gold  brought  hither  at  a 
profit  really  greater  than  would  have  been  realized 


I 


TRANS-ATLANTIC  CABLES  AND  EXCHANGE     123 


had  the  bars,  originally  purchased,  been  trans- 
shipped at  London  for  New  York. 

One  comparatively  recent  transaction  of  histori- 
cal interest,  will  illustrate  the  usefulness  of  the 
cable  in  conducting  international  settlements.  At 
the  end  of  April,  1899,  after  the  ratification  of  the 
treaty  of  peace  between  the  United  States  and 
Spain,  the  State  Department  made  requisition  upon 
the  Treasury  Department  for  $20,000,000  in  gold  to 
pay  the  Philippine  indemnity.  Warrants  for  the 
amount  were  drawn  and  made  payable  to  the  order 
of  M.  Cambon,  the  ambassador  from  France  to  the 
United  States,  who  represented,  in  this  transaction, 
the  Spanish  Government.  The  National  City  Bank 
had  contracted,  through  its  correspondent,  the 
Deutsche  Bank  of  Berlin,  to  receive  and  transmit  to 
Berlin  this  indemnity.  In  making  preparation  there- 
for credits  to  a  sufficient  amount  were  accumulated 
by  the  City  Bank  and  placed  with  its  correspondent. 
The  above  noted  warrants  were  deposited  by  M. 
Cambon  in  the  City  Bank  for  collection,  and  the 
money  was  paid  by  the  New  York  Sub-Treasury  to 
the  bank,  through  the  clearing  house.  Thereupon 
the  bank  notified  its  correspondent  through  the 
cable  of  the  payment  of  the  indemnity,  which  notifi- 
cation was  accepted  by  the  Deutsche  Bank  as  the 
equivalent  of  a  draft  upon  the  accumulated  credit, 
and  the  money  was  paid  over  to  the  Bank  of  Spain 
for  account  of  the  Spanish  Government. 

It  is  noteworthy  that  not  a  dollar  of  the  gold  was 
bodily  transferred  from  the  Sub-Treasury  vaults. 
In  order  to  avoid  the  risk  and  cost  of  the  daily 
transportation  to  the  clearing  house  of  gold  in  pay- 
ment of  debit  balances  due  bv  the  Assistant  Treas- 


124  FOREIGN  EXCHANGE. 

urer,  a  form  of  receipt  had  been  devised  represent- 
ing the  theoretical  deposit  of  gold.  The  manager 
of  the  clearing  house  would  theoretically  receive 
from  the  Assistant  Treasurer  gold  in  payment  of 
the  latter's  debit  balance,  and  he  would  thereupon 
theoretically  deposit  the  gold  with  that  official,  tak- 
ing his  receipts  therefor,  which  receipts  would  be 
drawn  in  divisional  amounts  for  the  convenience  of 
banks  who  daily  required  gold  for  deposit  in  the  cus- 
toms fund  of  the  Treasury  for  tlie  payment  of. 
duties.  When  the  warrants  for  tlie  Philippine  iul 
demnity  were  paid  through  the  clearing  house,  pay| 
ment  was  made  in  the  manner  above  stated,  witl 
the  Assistant  Treasurer's  receipts,  and  the  lattet 
were  accepted  by  the  City  Bank  in  lieu  of  gold,  thus' 
saving  the  trouble  and  expense  of  transporting 
forty  tons  of  the  metal  from  the  Sub-Treasury  to 
the  bank  and  its  subsequent  return  in  the  regular 
course  of  business.  In  the  process  of  paying  the 
indemnitj^  it  will  be  observed  by  the  above  that  not 
only  was  the  money  market  freed  from  disturbance, 
but  there  was  no  derangement  to  the  exchange 
market,  the  credits  preparatory  to  the  payment 
having  been  gradually  accumulated,  and  the  cable 
facilitated  the  final  settlement. 


CHAPTER  XXIII. 

ADVANTAGES  OF  THE  PROPOSED  TRANSPACIFIC 
CABLE— OBSTACLES  TO  ITS  CONSTRUCTION 
NOW  OVERCOME— LENGTH  OF  THE  SECTIONS  OF 
THE  NEW  LINE— OUR  COMMERCE  WITH  THE 
ORIENT  WILL  BE  PROMOTED  BY  THE  INSTAL- 
LATION OF  THE  CABLE  AND  EXCHANGE  TRANS- 
ACTIONS FACILITATED— MANILA  THE  BASE  FOR 
OUR  ORIENTAL  COMMERCIAL  AND  FINANCIAL 
OPERATIONS. 

The  assertion  that  submarine  electric  wires  have 
invaded  every  ocean  except  the  Pacific  will  not  long 
be  true.  If  the  enterprise  now  undertaken  shall  be 
successful  there  will,  within  the  next  year,  be  cable 
communication  with  Honolulu  and,  within  two 
years,  with  Manila,  thus  giving  Americans  an  un- 
broken line  between  San  Francisco  and  our  Pacific 
possessions.  Then  will  the  electric  wires  literally 
encircle  the  globe. 

The  chief  obstacle  heretofore  existing  to  the  es- 
tablishment of  a  trans-Pacific  cable  system  was 
found  in  the  fact  that  the  necessary  mid-ocean  rest- 
ing places  could  not  be  satisfactorily  obtained  or 
arranged  for,  no  single  Government  controlling  a 
sufficient  number  of  suitable  landing  places  to  make 
a  cable  system  practicable,  in  view  of  the  belief 
that  the  distance  through  which  messages  could  be 
sent  and  cables  controlled  was  limited.    The  annex- 


126  FOREIGN  EXCHANGE. 

ation  by  the  United  States  Government  of  the 
Hawaiian  Islands  and  the  acquisition  of  Guam,  of 
Wake  Island  and  of  the  Philippines,  which  resulted 
from  the  war  with  Spain,  removed  the  above-noted 
obstacle  and  since  then  the  necessity  of  direct  and 
independent  cable  communication  with  our  outly- 
ing possessions  in  the  Far  East  has  almost  daily 
grown  more  imperative.  These  acquisitions  have 
provided  such  desirable  resting  and  landing  places 
for  the  proposed  cable  that  the  greatest  length  of 
the  line,  2,089  miles,  between  San  Francisco  and 
Hawaii,  will  be  shorter  than  the  longest  trans- 
Atlantic  line,  which  is  3,250  miles,  between  Brest, 
France,  to  Cape  Cod,  Mass.,  and  this  length  will  be 
45  miles  less  than  that  of  the  first  trans-Atlantic 
cable  between  Trinity  Bay,  Newfoundland,  and 
Valentia  Bay,  Ireland.  The  distance  from  Hawaii 
to  Wake  Island  is  2,040  miles,  from  this  island  to 
Guam  1,290  miles,  from  Guam  to  Manila,  1,520 
miles,  and  from  Manila  to  the  Asiatic  Coast,  630 
miles.  This  will  make  the  entire  length  of  the  pro- 
posed cables  7,569  miles;  and  what  is  of  greatest 
importance  is  the  fact  that  they  will  be  operated 
and  controlled  by  an  American  enterprise.  The 
route  now  taken  by  messages  hence  to  Manila  is 
through  the  Atlantic  cable  to  England,  thence  by 
cable  and  land  lines  to  Suez,  Bombay,  Singapore, 
Saigon,  Cochin  China,  Hong  Kong  and  Manila,  a 
distance  of  14,000  miles,  at  a  word  rate  of  |2.35.  As 
a  matter  of  course,  when  the  more  direct  route 
through  the  Pacific  cable  shall  be  completed  tariffs 
will  be  reduced,  for  then  there  will  be  active  compe- 
tition. 
The  advantages  which  must  result  from  the  open- 


THE    PROPOSED    TRANS-PACIFIC    CABLE.       12t 

ing  of  telegraphic  communication  with  the  Hawaii- 
an Islands  will  be  so  great  as  to  encourage  the  ener- 
getic prosecution  of  cable  construction  to  connect 
the  Philippines,  and  it  seems  probable  that  within 
the  now  estimated  time  the  completed  line  between 
San  Francisco  and  Manila  will  be  in  operation. 
Even  with  the  advantage  of  comparatively  frequent 
mail  service  between  the  Pacific  ports  and  our  far 
eastern  possessions  our  commerce  with  the  Orient 
is  only  7  per  cent,  of  that  of  the  countries  of  Asia 
and  Oceanica,  lying  commercially  adjacent  to  the 
Philippines,  which  commerce  amounts  to  more  than 
12,125,000,000  annually,  and  this,  too,  despite  the 
fact  that  the  imports  into  these  countries  are  large- 
ly composed  of  articles  produced  in  the  United 
States.  The  installation  of  cable  communication 
will  doubtless  so  greatly  facilitate  our  trade  with 
the  Orient  as  to  make  necessary  the  establishment 
of  more  frequent  means  of  transportation,  and  the 
growth  of  our  commerce  will  thereafter  be  rapid. 
The  success  of  the  tentative  tests  which  are  being 
applied  to  the  system  of  mail  transportation  be- 
tween Australia  and  London,  via  San  Francisco, 
will  in  all  probability  result  in  the  diversion  of  this 
mail  service  from  the  Suez  to  the  Pacific,  transcon- 
tinental and  Atlantic  route,  and  in  the  construction 
of  new  steamers.  Thus  will  our  commerce  with 
the  Hawaiian  Islands  be  given  opportunity  for  fur- 
ther expansion,  the  steamers  sailing  from  Sydney, 
N.  S.  W.,  connecting  with  Honolulu. 

Since  May,  1898,  when  Dewey's  victory  over  the 
Spanish  fleet  in  Manila  Bay  practically  gave  us  pos- 
session of  the  Philippine  Archipelago,  the  attention 
of  American  merchants  has  been  more  or  less  con- 


128  FOREIGN  EXCHANGE. 

centrated  upon  these  islands,  and  careful  study  has 
been  made  of  the  conditions  and  the  possibilities 
for  the  commercial  development  of  these  new  acqui- 
sitions. Commissions  which  have  been  charged 
with  official  inquiries  regarding  the  resources  of 
these  islands  have  made  exceedingly  valuable  re- 
ports, enabling  our  merchants  and  capitalists  to 
form  an  accurate  judgment  as  to  the  opportunities 
offered  for  profitable  investments.  Naturally, 
Manila  has  been  selected  as  the  base  for  such  enter- 
prises, and  it  will  doubtless,  for  this  reason,  be  de- 
veloped more  rapidly  than  will  other  probably 
equally  desirable  centres  in  the  Philippines.  Even- 
tually, therefore,  Manila  will  become  the  base  for 
all  our  Oriental  commercial  and  financial  operations. 
The  most  recent  official  investigation  has  been  di- 
rected to  currency  conditions  and  needs,  and  doubt- 
less this  will  result  in  the  adoption  by  Congress  of 
legislation  having  for  its  object  the  establishment 
of  the  currency  of  the  Philippines  upon  a  stable 
foundation.  This  is  highly  essential  to  safe  and 
profitable  commercial  transactions,  for,  with  a  cur- 
rency of  fluctuating  value,  such  as  that  which  now 
exists,  foreign  and  domestic  exchange  operations 
must  be  conducted  with  more  or  less  uncertainty  as 
to  profit. 


i 


CHAPTER  XXIV. 

FINANCIAL  AND  EXCHANGE  OPERATIONS  IN  THE 
ORIENT— THE  BUSINESS  CONTROLLED  BY  FOR- 
EIGN BANKS— HOW  EXCHANGE  IS  NEGOTIATED 
—A  RECENT  MOVEMENT  OF  GOLD  HITHER  FROM 
AUSTRALIA  EXPLAINED. 

Though  Australia  may  not  be  considered  as  actu- 
ally an  Oriental  country,  it  is  so  closely  allied  to  the 
Par  East  commercially  that  it  may  not  improperly 
be  regarded  as  of  an  importance,  so  far  as  trans- 
Pacific  trade  is  concerned,  equally  as  great  as 
China  or  Japan.  Including  Australia  there  is  a  pop- 
ulation of  600,000,000  along  a  coast  line  of  8,000 
miles,  reaching  from  Melbourne  to  Vladivostok  in 
Siberia.  The  annual  trade  of  these  millions  of  peo- 
ple exceeds  two  billions  of  dollars.  America's  com- 
merce with  this  vast  population  is  about  one-tenth, 
and  the  exchange  operations  resulting  from  this 
commerce  of  |200,000,000  is  wholly  conducted 
through  banking  houses  having  foreign  connec- 
tions. America's  commerce  with  China  alone  is 
now  about  |40,000,000,  while  that  with  Japan, 
though  somewhat  smaller,  promises  soon  to  equal 
this  amount. 

European  interests  in  banking  are  represented  in 
the  Orient  in  nearly  all  cities  where  foreigners  re- 
side or  visit,  and  these  interests  naturally  seek  by 


130  FOREIGN  EXCHANGE. 

every  means  in  their  power  to  promote  the  trade  of 
their  own  countrymen,  thus  placing  somewhat  at  a 
disadvantage  American  competitors  for  that  trade. 
Notwithstanding  this  drawback,  however,  Ameri- 
cans have  made  marvelous  commercial  progress  in 
the  Orient,  not  only  in  China  and  in  Japan,  but  in 
Australia,  and  doubtless  very  soon  the  banking 
field  will  be  occupied  by  our  capitalists  as  has  the 
commercial  field  by  our  merchants  and  manufac- 
turers. 

The  largest  of  the  foreign  banking  concerns  in 
China  is  the  Hong  Kong  and  Shanghai  Bank,  which 
was  incorporated  in  Great  Britain  in  1864.  It  has  a 
capital  of  |10,000,000,  and  though  its  main  office  is 
at  Hong  Kong,  it  has  branch  banks  at  nearly  all  the 
open  ports  of  Asia.  The  other  foreign  institutions 
having  representatives  in  the  Orient  are  the  Char- 
tered Bank  of  India,  Australia  and  China,  capital 
£800,000,  with  its  head  office  in  London;  the 
Deutsche-Asiatische  Bank,  the  principal  office  of 
which  is  in  Berlin,  and  the  Kusso-Chinese  Bank, 
whose  head  office  is  in  St.  Petersburg.  These  insti- 
tutions do  a  general  banking  business,  receive  de- 
posits, discount  local  bills  and  draw  and  negotiate 
foreign  exchange.  The  Union  Bank  of  Australia, 
which  likewise  transacts  a  foreign  banking  busi- 
ness, is  a  British  corporation  located  at  Melbourne, 
and  it  has  correspondents  in  the  chief  Oriental 
cities. 

The  currency  in  which  business  is  chiefly  done  by 
the  Chinese  banks  and  by  those  in  the  Philippines 
is  the  Mexican  dollar  and  the  British  dollar.  These 
coins  have  an  equal  legal  value  not  only  in  China 
but  in  the  Straits  settlements.    This  value,  how- 


EXCHANGE  OPERATIONS  IN  THE  ORIENT.         131 

ever,  fluctuates,  as  does  that  of  the  Haikwan  (cus- 
toms) tael,  consisting  of  one  and  one-third  ounces 
of  silver — the  currency  at  the  Chinese  treaty  ports 
— according  to  the  price  of  silver  as  determined  by 
the  quotations  for  this  metal  in  the  London  market. 
Tn  the  Philippines,  and  especially  at  Manila,  the 
Mexican  dollar  is  reckoned,  for  local  trade  pur- 
poses, at  50  cents  gold.  Large  commercial  transac- 
tions in  the  islands  as  well  as  elsewhere  in  the 
Orient  are,  however,  based  upon  the  exchangeable 
value  of  the  dollar,  which  often  fluctuates  from  day 
to  day;  during  the  first  six  months  of  1901  the  range 
was  from  50.9  to  47.3  cents  in  gold.  This  variable- 
ness in  value  of  the  Mexican  dollar  affords  oppor- 
tunity for  large  profits  by  bankers  dealing  either  in 
foreign  or  domestic  exchange.  The  banking  busi- 
ness in  the  Orient  is  highly  remunerative,  and 
through  long  experience  and  the  combination  in 
some  cases  of  warehousing  with  banking  the  man- 
agers of  these  financial  institutions  have  obtained 
control  of  the  most  valuable  of  the  commercial 
transactions  of  the  Far  East. 

The  process  of  conducting  Oriental  exchange' 
operations  is  practically  the  same  as  that  employed 
for  other  exchange  transactions,  with  the  excep- 
tion that,  because  of  the  distance,  long  sterling  and 
cable  transfers  are  preferred  to  other  forms  of  ex- 
change. Merchandise  exported  hence  to  any  por- 
tion of  the  Orient  is  accompanied  by  bills  of  lading 
and  other  documents,  as  in  the  case  of  exports  to 
Europe,  but  the  comparative  infrequency  of  com- 
munication necessitates  the  concurrent  forwarding 
also  of  the  commercial  exchange  draft  representing 
the  gold  value  of  the  goods.    When  the  consignment 


132  FOREIGN  EXCHANGE. 

is  sold,  silver  is  received  in  payment,  and  in  remit- 
ting or  drawing  for  the  proceeds  of  the  merchan- 
dise the  silver  is  converted  into  gold,  at  the  current 
rate  of  exchange,  thus  affording  opportunity  for 
profit  to  the  banker  negotiating  the  bill.  Exchange 
drafts  upon  the  Orient  are  made  either  through 
London  or  through  the  head  offices  on  the  continent 
of  the  banks  upon  which  the  bills  are  drawn,  and 
this  method  affords  opportunity  for  additional  pro- 
fit to  the  bankers  handling  the  bills.  Thus  in  the 
case  of  a  single  consignment  profit  is  extracted 
from  the  original  commercial  draft,  the  banker's 
bill  drawn  against  the  credit,  the  conversion  of  the 
currency  and  the  interest  account  making  the 
charges  against  the  bill  in  many  instances  exceed- 
ingly heavy. 

The  profits  of  banking  operations  chiefly  result 
from  the  buying  and  selling  of  exchange  and,  as  a 
rule,  the  charge  for  such  negotiations  is  computed 
at  the  rate  of  6  per  cent,  on  the  money  advanced  on 
bills  of  lading  for  the  period  consumed  in  obtaining 
returns.  As  this  time  is  from  ninety  to  one  hundred 
and  twenty  days  the  charge  amounts  to  an  import- 
ant sum  on  each  transaction.  Bankers  in  the  Orient 
loan  money  for  local  purposes  at  rates  ranging  from 
6  to  8  per  cent.,  according  to  the  circumstances,  and 
as  6  per  cent,  is  the  minimum  the  profits  are  usually 
satisfactory.  There  is  also  opportunity  for  gain  in 
advances  on  goods  in  warehouse  and  in  various 
other  ways  which  have  greatly  contributed  to  the 
revenues  of  the  foreign  banks  in  the  Orient.  As  a 
matter  of  course,  the  larger  the  capital  the  greater 
will  be  the  profits  which  the  new  American  banks, 
when  they  shall  be  established,  will  enjoy,  for,  with 


EXCHANGE  OPERATIONS  IN  THE  ORIENT.         133 

abundant  means  and  facilities  for  obtaining  busi- 
ness the  operations  of  the  institutions  can  be 
almost  indefinitely  extended.  The  American  bank 
at  Manila  has  a  capital  of  only  |100,000,  but  it  is 
represented  as  doing  a  very  profitable  business 
though  its  operations  are  entirely  local. 

The  interest  on  transactions  with  the  Orient  is 
always  an  important  factor  in  determining  in  what 
form  a  remittance  shall  be  made  whether  with  gold 
or  with  exchange.  This  interest  charge,  for  ex- 
ample, had  a  decided  influence  in  the  movement  of 
gold  hither  from  Australia  in  the  summer  of  1891. 
In  remitting  to  California,  the  bank  through  which 
the  remittance  was  made,  calculated  the  time  re- 
quired for  the  passage  of  a  draft  from  Melbourne 
to  London;  the  discount  on  the  draft  and  upon  the 
bill  covering  the  transaction  or  the  reimbursement 
of  the  credit  and  other  items  of  importance. 
Against  this  cost  calculation  was  made  of  the  short- 
er time  consumed  in  remitting  gold  to  San  Fran- 
cisco ;of  the  facilities  extended  by  the  United  States 
Treasury  for  the  free  transfer  of  the  gold,  through 
assay  office  check,  across  the  continent  to  New 
York,  and  of  the  broader  market  in  this  city  for  the 
exchange  resulting  from  the  transaction.  Practi- 
cally the  gold  was  placed  in  New  York  at  the  mere 
cost  of  transportation  from  Melbourne  to  San  Fran- 
cisco, and  the  remittance  was  doubtless  effected  at 
a  far  less  cost  than  would  have  been  incurred  by 
remittance  with  exchange  via  London.  Had  not 
the  United  States  Treasury  extended  the  facility  of 
free  transfer  of  the  gold  across  the  continent,  con- 
siderations as  to  the  interest  charge  might  have 
necessitated  a  resort  to  a  draft  instead  of  a  direct 


134  FOREIGN  EXCHANGE. 

gold  importation,  despite  the  adverse  exchange  con- 
ditions which  presumedly  prevailed  at  Melbourne. 
Hong  Kong  is  the  chief  exchange  centre  of  the 
Far  East,  as  London  is  the  exchange  centre  of  Eu- 
rope. Drafts  upon  Hong  Kong  are  made  in  sterling, 
or  in  marks,  francs  or  roubles,  according  to  the 
nationality  of  the  house  through  which  they  are 
drawn.  Drafts  made  in  Hong  Kong  upon  America, 
to  be  negotiated  through  London,  are  calculated  in 
dollars  upon  the  basis  of  the  current  exchange 
value  of  the  Mexican  dollar  in  gold.  For  example, 
the  exchange  at  Hong  Kong  on  London  might  be 
calculated  at  one  shilling  ten  and  a  half  pence  to 
the  Mexican  dollar,  which  would  be  the  equivalent 
of  about  45^  cents  gold,  and  the  draft  would  call  for 
the  amount  in  gold  dollars  to  be  remitted.  So  with 
drafts  made  in  America  upon  Hong  Kong  through 
London,  though  the  bill  of  exchange  would,  in  this 
case,  be  drawn  in  gold  dollars  and  settlement  would 
be  effected  by  the  conversion  of  the  gold  into  Mexi- 
can dollars. 


CHAPTER  XXV. 

HOW  THE  GOLD  BASIS  FOR  EXCHANGE  IS  CALCU- 
LATED—THE WEIGHT  AND  FINENESS  OF  THE 
CHIEF  MONIES  OF  ACCOUNT  IN  SIXTEEN  GOLD 
STANDARD  COUNTRIES— VALUES  AS  STATED 
BY  THE  UNITED  STATES  MINT  DIRECTOR— THE 
PRICE  OF  GOLD  ESTABLISHED  BY  LAW  AND  UNI- 
FORMITY THEREIN  SECURED. 

This  chapter  on  foreign  exchange  treats  of  the 
chief  moneys  of  account  of  the  various  commercial 
nations;  of  the  variableness  of  such  moneys  caused 
by  the  different  weights  and  fineness  of  the  metal 
contained  therein,  and  of  the  invariable  or  fixed 
price  of  the  pure  gold,  which  is  the  standard  govern- 
ing all  measures  of  values. 

We  select  from  Norman's  Cambist  the  following 
table,  showing  the  chief  moneys  of  account  of  six- 
teen of  the  gold-standard  countries,  the  gross 
weights  of  these  moneys  in  Troy  grains,  on  issue 
from  the  mints,  and  the  proportion  of  pure  gold 
contained  therein : 

Weight.  Percentage 

Country  and  monetary  unit,     grains.        pure  gold. 

Egypt,  pound .\  .  .  131.174958  ^     875 

Great  Britain,  pound 123.274478  916  2-3 

Turkey,  pound 111.3598  916  2-3 

United  States,  dollar. . . .  25.8  900 


136  FOREIGN  EXCHANGE. 

Russia,  rouble. 19.910817  900 

Portugal,  milreis 27.3965  916  2-3 

Uruguay,  peso 26.1887  917.9 

Argentina,  peso 24.89064  900 

Chile,  peso 23.534331  900 

Brazil,  milreis 13.8348  916  2-3 

Austro-Hungary,  florin..   10.455417  900 

Holland,  guilder 10.370543  945 

British  India,  rupee 8.218298  916  2-3 

Scandinavia,  krone 6.9141  900 

Germany,  mark 6.1458  900 

France,  franc 4.978128  900 

The  variableness  of  the  weights  and  fineness  of 
these  coins  above  indicated  necessitates  accurate 
computations  in  order  to  ascertain  the  precise  ex- 
changeable value  of  these  moneys  of  account.  These 
computations,  however,  are  readily  obtainable  in 
the  form  of  tables,  and  being  based  upon  fixed  data 
the  tables  are  relied  upon  in  exchange  operations 
without  question  or  attempt  at  verification. 

At  the  beginning  of  every  quarter  of  the  year  the 
director  of  the  United  States  mint  makes  public  a 
statement  of  values  in  United  States  currency  of 
foreign  coins,  for  the  purpose  of  establishing  uni- 
formity in  the  calculations  of  duties  upon  importa- 
tions of  merchandise  entered  at  the  various  custom 
houses.  There  is,  of  course,  no  variation  in  the 
valuation  of  gold  moneys  of  account,  the  weights 
and  fineness  being  established  by  the  laws  of  the 
countries  issuing  these  coins.  There  is,  however, 
more  or  less  variation  in  the  values  of  silver  moneys 
of  account,  caused  by  the  fluctuation  in  the  price  of 
the  metal  in  response  to  the  law  of  supply  and  de- 
mand.   The  following  table  shows  the  value  April 


CALCULATED  GOLD  BASIS  FOR  EXCHANGE.       137 

1,  1902,  of  the  gold  coins  of  the  various  countries 

above  named: 

Country  and  monetary  unit.  Value. 

Egypt,  pound  (piasters) $4,943 

Great  Britain,  pound  sterling 4.8665 

Turkey,  pound 4.44 

Russia,  rouble 0.515 

Portugal,  milreis 1.08 

Uruguay,  peso 1.034 

Argentina,  peso 0.965 

Chili,  peso 0.365 

Brazil,  milreis 0.546 

Austro-Hungary,  crown 0.203 

Holland,  guilder 0.402 

British  India,  rupee 0.324 

Scandinavia,  krone 0.268 

Germany,  mark 0.238 

France,  franc 0.193 

It  may  be  noted  that  Italy,  Greece,  Roumania, 
Bulgaria,  Servia,  Spain,  Switzerland,  Belgium  and 
Finland  have  monetary  units  under  different  names, 
each  of  which  is  of  the  value  of  the  French  franc — 
10.193. 

The  intrinsic  value  of  the  gold  monetary  units  of 
the  chief  commercial  countries  are  fixed  by  law.  In 
Great  Britain  the  value  of  gold  is  established  by  the 
act  of  Parliament  of  1844,  known  as  the  Peel  act. 
This  law  makes  it  obligatory  upon  the  Bank  of  Eng- 
land to  purchase  with  its  notes,  all  the  gold  that 
may  be  offered  to  that  institution  at  the  fixed  mini- 
mum price  of  £3  17  shillings  and  9  pence  per  ounce 
standard,  which  standard  is  11-12  fine,  or  91666+ 
parts  of  pure  gold  in  1,000  parts.  While  the  price 
of  gold  may  be  advanced  by  the  Bank  or  in  the  mar- 


138  FOREIGN  EXCHANGE. 

ket  either  in  response  to  a  demand  for  the  metal  or 
with  the  object  of  retarding  its  withdrawal  for  ex- 
port, the  price  does  not  decline  below  this  limit. 
Moreover,  Great  Britain  being  the  chief  commercial 
nation,  indirectly  establishes,  through  this  fixed 
minimum  price  for  gold,  the  value  of  the  metal  in 
other  commercial  countries. 

It  is  noteworthy  that  gold  is  the  only  commodity 
in  the  world  the  value  of  which  is  established  by 
law.  The  price  cannot  be  affected  either  by  abund- 
ance or  scarcity  of  supply.  No  matter  how  great 
may  be  the  volume  of  the  metal,  so  long  as  the  act 
of  Parliament  of  1844  stands  unrepealed,  or  without 
modification,  gold  will  find  in  the  Bank  of  England 
a  purchaser  at  the  price  established  by  that  law. 
And,  moreover,  though  there  is  no  international 
agreement  to  maintain  this  price,  the  fact  that  gold 
is  accepted  by  the  chief  commercial  nations  as  the 
one  universal  measure  of  values,operates  to  prevent 
any  attempt  to  change  its  valuation.  Hence  the 
gold  seeker  in  South  Africa  or  anywhere  upon  the 
face  of  the  globe  has  an  incentive  to  prosecute  his 
search,  by  the  knowledge  that  the  metal  which 
he  seeks  or  has  secured  can  be  readily  sold  at  any 
Government  assay  office  or  mint  at  the  equivalent 
of  the  above-noted  Bank  of  England  price  for  the 
metal.  The  goldseeker  may  be,  and  often  is,  com- 
pelled to  accept  a  lower  price  at  the  nearest  market 
by  reason  of  the  cost  of  transportation  from  the 
mine  or  placer,  or  market,  to  the  Government  mint 
or  assay  office,  but  this  is  the  only  reduction  that 
can  be  made  in  its  value.  Diamonds,  which  are 
much  more  valuable  than  gold,  may  be,  and  indeed, 
are,  depressed  in  price  by  over  sui)ply  in  the  market, 


CALCULATED  GOLD  BASIS  FOR  EXCHANGE.       139 

and  it  has  been  only  through  the  regulation  of  the 
output  by  wealthy  syndicates  that  these  gems  have 
not  been  greatly  cheapened,  since  the  discoveries  of 
the  deposits  in  the  Kimberly  mines.  Thousands  of 
ounces  of  gold  have,  however,  been  obtained  from 
the  Witswatersrand,  a  few  miles  distant  from  the 
diamond  deposits,  and  the  price  of  gold  has  been 
maintained  without  the  least  variation. 

While  the  act  of  Parliament  fixes  the  value  of 
gold  in  Great  Britain  and,  indirectly,  in  other  Euro- 
pean commercial  countries,  the  value  of  the  metal  is 
maintained  at  a  closely  corresponding  price  in  the 
United  States  through  the  operation  of  statutes 
passed  by  Congress,  which  established  the  weight 
and  fineness  of  our  monetary  unit.  The  act  of  Jan- 
uary 18,  1837,  declared  that  the  standard  of  fine- 
ness of  the  gold  and  silver  coins  should  be  900  parts 
of  pure  metal  and  100  parts  of  alloy.  The  weight  of 
the  gold  eagle  (|10)  was  fixed  at  258  grains  of  stand- 
ard, or  232.2  grains  of  jmre  gold.  The  act  of 
March  3,  1849,  i)rovided  for  the  coinage  of  a  gold 
dollar  of  25.8  grains,  which  should  be  the  unit  of 
value,  and  the  standard  of  fineness  established  by 
the  act  of  1837  was  preserved.  Upon  this  basis  of 
the  weight  and  fineness  of  the  monetary  unit  the 
price  of  pure  gold  per  ounce  was  fixed  at  |20.671834+. 
The  calculation  is  as  follows:  480  (grains  to  the 
ounce)  -^  23.22  grains  of  pure  gold  in  a  dollar^|20.- 
G71.834+. 

Similarly,  other  nations,  notably  Russia,  France, 
India,  Holland,  Portugal,  Spain,  Austro-Hungary, 
Germany,  Belgium,  the  Balkan  States,  Greece, 
Italy,  Japan,  the  Scandinavian  States,  Chili,  Peru 
and  other  South  American  countries,  have  from 


140  FOREIGN  EXCHANGE. 

time  to  time  fixed  the  value  of  pure  gold  through 
the  establishment  of  the  fineness  and  the  weight  of 
their  gold  coins,  so  that  now  there  is  almost  a  gen- 
eral uniformity  in  the  value  of  the  metal,  and  where 
differences  exist  they  are  comparatively  unimport- 
ant. With  such  uniform  adherence  to  a  fixed  value 
for  gold  it  would  be  impolitic  for  any  nation  to 
cause,  through  legislation,  such  modification  of  its 
coinage  laws  as  would  have  the  effect  of  changing 
the  value  of  gold.  Were  the  fineness  or  the  weight 
of  the  coin  to  be  increased  by  such  nation  because 
of  a  great  abundance  of  the  metal,  as  the  result  of 
new  discoveries  or  of  new  processes  of  refining,  the 
entire  coinage  of  that  country  would  have  to  be 
made  to  conform  to  the  change,  and  this  would 
doubtless  be  followed  by  an  export  of  the  higher- 
valued  coins  almost  as  fast  as  they  could  be  pro- 
duced at  the  mint.  A  change  in  the  direction  of 
lessening  the  value  would  be  so  improbable  as  not 
to  be  worthy  of  discussion. 

Practical  stability  in  the  value  of  gold  being  as- 
sured for  the  reasons  above  noted,  all  values  of 
commodities  have  one  standard,  as  unerring  as  the 
standard  for  lineal  measurement.  Exchangeable 
values  between  various  countries  having  gold  mone- 
tary systems  are  easily  computable,  and  exchange 
can  be  worked  with  tables  which  are  of  uniform 
accuracy.  Exchangeable  values  between  countries 
having  gold  and  those  having  silver  or  mixed  mone- 
tary systems  are  computed  upon  the  basis  of  gold, 
the  value  of  this  metal  measuring  that  of  pure 
silver,  which  is  treated  as  merchandise.  Moreover, 
the  market  value  of  silver  in  all  countries  is  estab- 
lished on  the  basis  of  the  price  in  gold  of  the  metal 


CALCULATED  GOLD  BASIS  FOR  EXCHANGE.       141 

in  London  for  English  standard  .925  fine,  which 
price  is  regulated  by  the  law  of  supply  and  demand, 
and  it  is  therefore  variable.  But  calculation  of 
rates  for  exchange  between  gold  and  silver  stand- 
and  countries  is  made  with  the  aid  of  tables,  thus 
facilitating  the  working  of  the  exchange  at  all 
prices  of  the  baser  metal  in  the  London  market. 


CHAPTER  XXVI. 

THE  COUNTRY'S  ACCUMULATION  OP  GOLD— WHILE 
EUROPEAN  BANKS  JEALOUSLY  GUARD  THEIR 
STOCKS  OF  THE  METAL  OUR  TREASURY  HOLD- 
INGS THEREOF  ARE  UNPROTECTED  BY  RESTRIC- 
TIVE REGULATIONS— GOLD  FOR  EXPORT  SUP- 
PLIED AT  ONLY  NOMINAL  CHARGE  FOR  BARS- 
FACILITIES  EXTENDED  TO  IMPORTERS  OF  GOLD 
AT  PACIFIC  COAST  POINTS. 

The  remark  has  often  been  made  during  the  peri- 
odical export  movements  of  gold  to  Europe  that  our 
stock  of  the  metal  is  so  greatly  in  excess  of  our  re- 
quirements that  the  export  of  a  few  millions  of  the 
metalj  more  or  less,  need  be  viewed  with  no  appre- 
hension,  as  the  gold  can  easily  be  spared.  It  is 
largely  due  to  this  indifference  which  has  been  mani- 
fested regarding  exports  of  the  metal  that  so  much 
of  it  has  at  times  been  shipjied  abroad.  If  the 
export  movement  of  gold  were  as  promptly  reflected 
in  our  money  markets  as  such  exports  are  in  the 
principal  markets  of  Europe  the  procurement  of  the 
gold  for  this  purpose  might  be  more  difficult  or  at 
least  be  attended  with  greater  cost  to  the  shipper. 

The  imposition  of  restrictions  upon  the  export  of 
gold  has  been  opposed  whenever  the  suggestion  has 
been  made  that  this  Government  should,  in  self  de- 
fense, increase  the  charges  for  export  bars,  at  least 


THE  COtJNTRY'S  ACCUMULATION  OF  GOLD.       143 

to  as  great  a  premium  as  that  demanded  by  Euro- 
pean banks  when  gold  is  withdrawn  therefrom  for 
shipment  out  of  the  country.  The  opposition  has 
come  principally  from  foreign  bankers,  who  have 
claimed  that  when  gold  is  required  for  the  settle- 
ment of  international  trade  balances  it  would  be 
unjust  to  exact  a  premium  for  the  metal.  These 
bankers,  however,  do  not  seem  to  consider  that 
there  is  any  injustice  in  the  exaction  by  the  Banks 
of  England  or  France  of  a  premium  upon  the  metal 
even  when  it  is  required  for  payment  of  debts. 
Moreover,  this  imposition  of  a  premium  by  these 
banks  is,  seemingly,  justified  by  the  plea  that  they 
are  private  corporations,  and,  therefore,  that  they 
have  a  right  to  exact  the  best  price  possible  for  the 
metal,  which  may  be  needed  for  export,  even  though 
such  export  may  be  for  the  purpose  of  settling  inter- 
national obligations. 

The  premiums  upon  gold  demanded  by  the  Bank 
of  England  are  graded  according  to  the  degree  of 
urgency  which  exists  for  protecting  the  stock  of 
bullion  in  the  Bank.  The  range  of  such  premiums  is 
from  a  fraction  of  a  penny  per  ounce  above  the  nor- 
mal price  for  gold  bars — 77  shillings  and  9  pence — • 
to  78  shillings.  The  Bank  sells  its  American  gold 
coins,  of  which  it  has  more  or  less  of  a  supply,  and 
which  it  accumulates  for  the  purpose  of  meeting  re- 
quirements for  export,  and  the  price  for  these  coins 
ranges  from  76  shillings  and  4  pence  to  76  shillings 
and  9  pence  per  ounce.  The  bank  discourages  the 
export  of  sovereigns  to  such  an  extent  that  ship- 
pers refrain  from  attempting  to  procure  such  coins 
when  they  need  gold  for  this  purpose.  The  Bank 
of  France  refuses  to  exchange  its  notes  for  gold 


144  FOREIGN  EXCHANGE. 

when  the  metal  is  required  for  export,  and  the  Bank 
imposes  a  premium  ranging  from  1  franc  to  3  francs 
per  thousand,  or  even  a  higher  premium  when  gold 
is  bought  from  the  Bank  for  shipment  out  of  the 
country. 

In  accordance  with  the  United  States  mint  regu- 
lations a  charge  of  4  cents  per  100  dollars  is  made 
for  what  are  known  as  commercial  bars  of  gold, 
these  varying  in  fineness  from  990  to  997.  The  ship- 
pers are  required  to  pay  for  the  bars  with  gold  coin, 
which  coin,  however,  is  freely  procurable  at  the 
Sub-Treasury  in  exchange  either  for  gold  certifi- 
cates or  for  legal  tender  notes.  It  will  be  observed 
that  there  is  no  restriction  upon  the  withdrawals  of 
gold  for  export.  The  shippers  may  exercise  the 
option  of  taking  gold  coin,  in  which  case  no  charge 
is  made,  and  the  coin  is  supplied  in  exchange  for 
gold  certificates  or  for  legal  tender  notes.  The  only 
expense  incurred  by  the  shipper  other  than  the  pre- 
mium on  the  bars  is  that  of  packing  and  removal  of 
the  gold  from  the  Government  repository.  The 
charge  of  4  cents  per  100  dollars  for  bars  is  regard- 
ed by  the  mint  authorities  as  only  a  fair  exaction, 
and  shippers  make  no  complaint.  This  charge  was 
made  in  order  to  induce  exporters  to  take  bars  in- 
stead of  coin,  the  cost  of  coinage  and  of  transporta- 
tion of  the  bullion  to  the  mint  being  thereby  saved 
to  the  Government.  There  is  no  profit  resulting 
from  the  sale  of  the  bars,  as  is  the  case  with  gold 
bought  from  the  European  banks,  and  our  stock  of 
the  metal  is  absolutely  unprotected  by  expensive 
exactions  on  the  part  of  the  Government. 

This  Government  is  not  only  liberal  in  its  treat- 
ment of  exporters  of  gold,  but  it  is  likewise  liberal 


THE  COUNTRY'S  ACCUMULATION  OF  GOLD.       145 

with  importers  thereof,  whether  such  importations 
consist  of  coin  or  of  bullion.  There  were  in  1901 
brought  across  our  Northwestern  border  about  |20,- 
000,000  gold  from  the  Klondike  fields.  This  gold 
was  bought  by  the  importers  at  a  cost  in  Dawson 
City  or  Atlin,  British  Columbia,  of  from  $16  to  |17 
per  ounce.  The  purchasers  shipped  it  across  the 
line,  either  to  Seattle,  Wash.,  or  to  San  Francisco, 
there  being  no  Government  assay  offices  in  British 
Columbia  at  which  the  bullion  could  be  assayed  and 
converted  into  fine  bars.  Most  of  the  bullion  was  in 
the  form  of  dust  and  grains,  or  nuggets,  containing 
more  or  less  silver  and  copper  ore.  The  bullion  was 
converted  into  bars  at  the  above-mentioned  Ameri- 
can offices,  the  cost  of  the  assay  and  parting  was 
charged  against  the  ^'meW^  and  the  ascertained 
value,  at  the  rate  of  |20.67  per  ounce  for  pure  gold, 
was  paid  to  the  owner  of  the  bullion  with  a  check 
payable  at  any  United  States  Sub-Treasury;  the 
silver  in  the  mass  being  also  bought  at  current 
prices.  This  method  of  payment  enabled  the  de« 
positor  of  the  bullion  to  save  the  cost  of  transpor- 
tation of  the  coin  disbursed  for  his  deposit,  he  re- 
ceiving at  the  Sub-Treasury  in  this  city  gold  coin  on 
presentation  of  his  check.  The  importers  of  the 
$12,000,000  gold  from  Australia  which  was  received 
in  1901,  on  the  arrival  of  the  foreign  coins  at  San 
Francisco,  deposited  the  gold  at  the  assay  office  in 
that  city,  and  the  importers  were  paid  therefor 
with  checks  payable  at  New  York;  the  importers 
were  thus  saved  the  expense  of  transporting  the 
coin  proceeds  of  their  bullion  across  the  continent. 
The  payment  by  the  Government  for  the  bullion 
from  the  Klondike  and  from  Australia  transferred 


146  FOREIGN  EXCHANGE. 

the  ownership  of  the  metal  from  the  importers  to 
the  Treasury.  The  bullion  was  later  converted  into 
gold  coin,  and  it  w^as  left  in  the  custody  of  the  as- 
sistant treasurer  at  San  Francisco.  Inasmuch  as 
the  year's  operations  of  this  character  resulted  in 
a  supply  of  coin  at  San  Francisco  in  excess  of  the 
needs  of  that  section  of  the  country,  this  accumula- 
tion of  coin  will  eventually  have  to  be  transported 
to  the  East,  either  by  mail  at  60  cents,  or  by  express 
at  |2  per  |1,000,  and  in  either  case  the  cost  of  trans- 
portation will  be  defrayed  by  the  Government,  thus 
practically  increasing  the  cost  of  the  metal.  If,  in- 
stead of  being  coined,  the  gold  shall  be  left  in  the 
form  of  bars,  the  transportation  of  these  bars  will 
involve  an  additional  expense,  and  possibly  these 
identical  bars  may  be  sold  to  exporters  at  4  cents 
per  |100,  or  at  an  actual  loss  to  the  Government. 
Thus  by  its  above-noted  liberal  treatment  of  import- 
ers of  gold  the  Treasury  incurs  a  loss  on  its  bullion 
purchases.  In  some  cases  the  Canadian  bankers 
who  imported  Klondike  bullion  have  shipped  the 
coin  received  for  their  checks  to  Canada,  where 
American  gold  is  needed  for  circulation,  there  being 
no  mint  in  the  Dominion. 


CHAPTER  XXVII. 

TABLES  FOR  THE  READY  CONVERSION  OF  BRITISH 
INTO  AMERICAN  CURRENCY— ILLUSTRATIONS 
OF  THE  METHOD  OF  MAKING  CALCULATIONS— 
THE  USE  OF  DECIMALS  IN  STERLING  EXCHANGE 
COMPUTATIONS— EXAMPLES  FOR  CONVERSION 
AND  OF  OPERATIONS  IN  INTEREST  AND  OF 
DUTY  ON  IMPORTATIONS. 

In  mercantile  houses,  and  more  particularly  in 
those  handling  importations  of  goods  from  Great 
Britain  and  its  colonies  and  dependencies,  there  is 
almost  constant  need  for  a  ready  reckoner  of  values 
stated  in  English  money.  The  equivalents  in  Ameri- 
can currency  of  the  pound  sterling  and  of  the  mul- 
tiples thereof  are  easily  computable;  when  values 
are  also  stated  in  shillings,  in  pence  and  in  farth- 
ings, however,  separate  calculations  are  necessary 
for  each  transaction. 

After  the  equivalent  or  par  value  in  United 
States  currency  of  the  pound  sterling  was  fixed  by 
act  of  Congress  in  LS73,  at  |4.8665,  tables  were  pre- 
pared by  the  Treasury  Department  with  the  object 
of  facilitating  the  conversion  by  customs  employ- 
ees, of  pounds,  shillings  and  pence  into  our  currency 
on  the  basis  of  the  English  pound.  These  tables 
though  sufficiently  exact  for  the  purpose  intended, 
were  not  enough  so  for  the  larger  operations  of  for- 


148  FOREIGN  EXCHANGE. 

eign  exchange  houses,  but  for  ordinary  mercantile 
transactions  they  were  found  quite  useful,  and  even 
in  small  exchange  offices  they  are  probably  still  em- 
ployed. The  following  is  the  table  for  the  ascertain- 
ment of  the  equivalent  of  the  par  value  of  multiples 
of  the  pound: 


0         12 

3 

4 

1  . 

2  . 

3  . 
4^  . 
5  . 

i^    . 

7  . 

8  . 

9  . 

.  4.8665....  53.5315....  58.398. 
.   9.733  ....  102.1965  ....  107.063  . 
.  14.5995  ....  150.8615  ....  155.728  . 
.  19.466  ...  199.5265  ....  204.393  . 

.  24.3325 248.1915  ....  253.058  . 

.  29.199  ....  296.8565  ....  301.723  . 
.  34.0655  ....  345.5215  ....  350.388  . 
.  38.932  ....  394.1865  ....  399.053  . 
.  43.7985  ....  442.8515  ....  447.718  . 

...  63.2645. 
...111.9295  . 
...169.5945  . 
...  209.2595  . 
...257.9245  . 
...306.5895  . 
...355.2545  . 
...  403.9195  . 
...452.5845  . 

...  68.131 
...116.796 
...165.461 
...214.126 
...262.791 
...311.456 
...364.121 
...408.786 
...457.451 

5          6          7 

8 

9 

72.9975 77.864 82.7305 

121.6625  ......  126.529 131.3955 

170.3275 175.194 180.0605 

218.1^^925 223.859 228.7255 

267.6575 272.524 277.3905 

316.322.^     :v?A  Ifi^ci            .^^ft  o.^.^.fS 

.  87.597.... 
.  136.262  .... 
.  184.927  .... 
.  233.592  .... 
.  282.257  .... 
330  922  .... 

.  92.4633 
.  141.1285 
.  189.7935 
.  238.4585 
.  287.1235 
335  7885 

364.9^ 
413. 6E 
462.33 

^75 369.854 374.7205 

>25 418.519 423.3855 

75 467.184 472.0505 

.  379.587  .... 
.  428.252.... 
.476.917  .... 

.  384.4535 
.  433.1185 
.481.7835 

To  ascertain  the  par  value  of  any  number  of 
pounds  represented  by  one  figure,  find  the  figure  in 
the  left-hand  margin  of  the  table  and  its  value  will 
appear  in  the  adjoining  column  opposite  the  figure. 
For  example,  if  it  is  desired  to  obtain  the  value  of 
five  pounds,  by  following  the  left-hand  margin  to 
the  figure  5,  there  will  be  found  |24.3325.  The  value 
of  57  pounds  is  ascertained  by  following  the  line 
number  five  in  the  left-hand  margin  to  column 


CONVERSIONS  OF  TABLES.      .  149 

seven,  and  there  will  be  found  |277.3905.  To  ascer- 
tain the  value  of  576  pounds  move  the  decimal  point 
in  the  |277.3905  one  place  to  the  right  and  it  shows 
12773.905  as  the  value  of  570  pounds.  Then  add  the 
value  of  6  pounds,  |29.199,  and  the  result  is 
12803.104.  This  calculation  proves  by  the  following: 
|4.8665x576=$2803.1040. 

The  equivalent  or  the  par  value  of  the  English 
shilling  in  our  currency  is  .243325  cents,  and  that  of 
the  English  penny  .0202766  cents.  The  following 
table  shows  the  approximate  value  of  every  combi- 
nation of  shillings  and  pence,  less  than  the  pound 
sterling,  the  upper  margin  representing  the  shil- 
lings and  the  left-hand  margin  the  pence: 


0   1 

2 

3 

4 

5 

6 

7 

8 

9 

0  .. 

24. 

.  .48.. 

.73.. 

.97.. 

1.21.. 

1.46.. 

1.70.. 

1.94.. 

2.19.. 

1  .. 

.02..  .26. 

.  .50.. 

.75.. 

.99.. 

1.23.. 

1.48.. 

1.72.. 

1.96.. 

2.21.. 

2  .. 

.04..  .28. 

.  .52.. 

.77.. 

1.01.. 

1.25.. 

1.50.. 

1.74., 

1.98.. 

2  23 

8  .. 

.06..  .30. 

.  .54.. 

.79.. 

1.03.. 

1.27.. 

1.52.. 

1.76.. 

2.00.. 

2.25:: 

4  .. 

.08  .  .32. 

.  .56.. 

.81.. 

1.05.. 

1.29  . 

1.54.. 

1.78.. 

2.02.. 

2.27.. 

5  .. 

.10..  .34. 

.  .58.. 

.83.. 

1.07.. 

1.31.. 

1.56.. 

1.80.. 

2.04.. 

2.29.. 

6  .. 

.12..  .36. 

.  .60.. 

.85.. 

1.09.. 

1.33.. 

1.58.. 

1.82.. 

2.06.. 

2.31.. 

7  .. 

.14..  .38. 

..  .62.. 

,  .87.. 

1.11.. 

1.35.. 

1.60.. 

1.84.. 

2.08.. 

2.33.. 

8  .. 

.16..  .40. 

,.  .64.. 

,  .89.. 

1.13.. 

1.37..' 

1.62.. 

1.86.. 

2.10.. 

2.35.. 

0  .. 

.18..  .42 

..  .66.. 

.  .91.. 

1.15.. 

1.39.. 

1.64.. 

1.88.. 

2.12.. 

2.37.. 

10  .. 

.20..  .44, 

,.  .68., 

.  .93.. 

1.17.. 

1.41.. 

1.66.. 

1.90.. 

2.14.. 

2.39 

11  .. 

22..  .46. 

.  .70.. 

.95.. 

1.19.. 

1.43.. 

1.68.. 

1.92.. 

2.16.. 

2.41- 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

2.43. 

.  2.67.. 

2.92.. 

3.16. 

.  3.40. 

.  3.65. 

.  3.89. 

.  4.13. 

.  4.38. 

.  4.62 

2.45. 

.  2.69.. 

2.94.. 

3.18. 

.  3.42. 

.  3.67. 

.  3.91. 

.  4.15. 

.  4.40. 

.  4.64 

2.47. 

.  2.71  . 

2.96.. 

3.20. 

.  3.44. 

.  3.69. 

.  3.93. 

.  4.17. 

.  4.42. 

.  4.66 

2.49. 

.  2.73.. 

2.98.. 

3.22. 

.  3.46. 

.  3.71. 

.  3.95. 

.  4.19. 

.  4.44. 

4.68 

2.51. 

.  2.75.. 

3.00.. 

3.24 

.  3.48. 

.  3.73. 

.  3.97. 

.  4.21. 

.  4.46. 

.  4.70 

2.53. 

.  2.77.. 

3.02.. 

3.26. 

.  3.50. 

.  3.75. 

.  3.99. 

.  4.23. 

.  4.48. 

.  4.72 

2.55 

..  2.79.. 

3.04.. 

3.28. 

.  3.52. 

.  3.77. 

.  4.01. 

.  4.25. 

.  4.50. 

.  4.74 

2.57. 

,.  2.81.. 

3.06.. 

3.30. 

.  3.54. 

.  3.79. 

.  4.03. 

.  4.27. 

.  4.52. 

.  4.76 

2.59. 

..  2.83.. 

3.08.. 

3.32. 

.  3.56. 

.  3.81. 

,.  4.05. 

,.  4.29. 

.  4.54. 

.  4.78 

2.61. 

..  2.85.. 

3.10.. 

3.34. 

.  3.58. 

.  3.83. 

..  4.07. 

,.  4.31. 

.  4.56. 

.  4.80 

2.63..   2.87..  3.12..   3.36..   3.60..  3.85..   4.09..  4.33..   4.58..   4.82 
2.65..  2.89..  3.14...  3.38..  3.62..  3.87..   4.11..  4.35..   4.60,.   4.84 


150  FOREIGN  EXCHANGE. 

To  find  the  value  of  17  shillings  and  6  pence  follow 
the  upper  line  in  the  table  until  17  is  reached,  then 
downward  to  the  line  six  and  |4.25  will  be  found. 
The  calculation  made  by  multiplying  .243325  cents, 
the  value  of  a  shilling,  by  .175  or  seventeen  and  a 
half  shillings  results  in  14.2581875.  It  will  be  ob- 
served that  while  the  computations  for  pounds  in 
the  first  table  are  carried  to  the  fourth  decimal 
place  the  calculations  for  shillings  and  pence  are 
extended  only  to  the  second  decimal.  In  the  pro- 
cess of  verification,  however,  which  a  careful  stu- 
dent should  not  neglect,  the  deficiency  can  easily  be 
supplied.  The  above  tables  were  prepared,  as  here- 
tofore noted,  for  the  use  of  computists  of  the  values 
of  imports,  where  such  values  were  given  in  ster- 
ling money,  and  they  were  not  intended  to  be  em- 
ployed in  foreign  exchange  offices  as  substitutes  for 
tables  which  have  calculations  for  exchange  cover- 
ing a  comparatively  wide  range.  Indeed,  the  com- 
putations are  wholly  confined  to  the  equivalents  in 
our  currency  of  multiples  of  the  pound  sterling  and 
divisional  parts  of  the  pound  in  shillings  and  pence 
showing  the  value  of  such  divisional  parts  based  on 
the  par  of  exchange  between  this  country  and  Great 
Britain. 

In  calculating  exchange,  decimals,  instead  of 
fractions  seem  to  be  preferable  because  thereby 
greater  accuracy  can  be  attained  and,  moreover,  in 
large  transactions  it  is  desirable  that  the  computa- 
tions shall  be  carried  to  the  farthest  possible  point. 
Most  of  the  European  countries  have  adopted  the 
decimal  monetary  system,  thus  facilitating  calcula- 
tions, and,  indeed,  this  system  is  in  use  almost 
everywhere  except  in  Great  Britain  and  its  colonie^s 


CONVERSIONS  OF  TABLES.  151 

and  dependencies.  The  table  of  English  money  is: 
4  farthings  one  penny,  12  pence  one  shilling  and  20 
shillings  one  pound.  There  are  960  farthings,  240 
pence  and  20  shillings  to  the  pound.  Additions  in 
British  money  involve  the  carrying  of  odd  farthings 
to  pence,  of  pence  to  shillings  and  of  shillings  to  the 
pound,  a  somewhat  complicated  process  for  those 
unaccustomed  to  its  use.  The  process  of  subtrac- 
tion in  English  money  is  equally  complicated,  but 
these  complications  can  be  obviated  by  first  con- 
verting the  shillings,  pence  and  farthings  to  deci- 
mals of  the  pound. 

Conversion  of  English  money  into  decimals  is  a 
simple  process.  The  shillings,  according  to  the  rule 
in  Brooks,  are  multiplied  by  5,  each  shilling  being 
five-hundredths  of  a  pound.  The  pence  are  multi- 
plied by  .004  1-6,  one  penny  being  l-240th  or  4  1-6 
thousandths  of  a  pound.  The  use  of  the  fraction 
1-6  can  be  avoided  by  adding  1,  if  the  result  is  over 
12,  and  2  if  the  result  should  be  over  35.  The  fol- 
lowing example  is  given  for  the  reduction  of  £525 
10s.  6d.  to  pounds  and  decimals  of  a  pound:  £525  = 
£525  .10s  =  .50  and  6d.  =  .025.  The  decimal  is  £525.- 
525.  To  convert  this  sum  of  English  money,  £525 
10s.  6d.  into  United  States  currency  reduce  the  shil- 
lings and  pence  to  the  decimal  of  a  pound,  or  £525.- 
525,  as  above,  and  multiply  by  the  rate  for  exchange 
which,  in  the  example  given,  is  14.96^  or  |4.9650. 
The  result  is  |2.609.2316250,  or  |2.609.23.  In  the  re- 
verse process,  the  conversion  of  United  States  cur- 
rency into  pounds  and  decimals  of  a  pound,  divide 
the  amount  in  dollars  and  cents  by  the  rate  per 
pound  and  it  will  give  the  desired  result.  Then 
multiply  the  decimals  of  the  pound  by  20  and  it  will 


152  FOREIGN  EXCHANGE. 

show  the  shillings  and  decimals  of  the  shilling. 
Multiply  the  decimal  of  the  shilling  by  12  and  it  will 
give  the  pence  and  decimals  of  pence.  For  illustra- 
tion find  the  equivalent  in  English  money  of  |2,609.- 
23  at  14.96-1.  |2,609.23  -  4.9650  =  525.5246,  .5246  x 
20s.  =  110.4920,  4920  x  12  =  d  5.9040  or  6d.  The 
answer,  therefore,  is  |525  10s.  6d. 

The  processes  of  calculating  interest  or  per  cent, 
in  English  money,  as  laid  down  in  Brooks,  involve 
the  conversion  of  the  shillings  and  pence  into  the 
decimals  of  the  pound  and  multiplying  the  result  by 
the  rate  per  cent. ;  then  multiply  the  decimal  of  that 
result  by  20s.  and  the  whole  number  will  be  shil- 
lings. Multiply  the  decimal  of  the  shillings  by  12d. 
and  it  will  give  pence  and  the  decimal  of  pence.  For 
example  to  find  the  interest  at  4  per  cent,  per  an- 
num on  £550  15s.  lid.  The  decimal  of  15s.  is  .75  and 
that  of  lid.  is  .046,  making  the  sum,  decimally 
stated  £550.796.  This  multiplied  by  4  per  cent.  = 
£22.03184,  the  interest  on  the  sum  for  one  year.  Re- 
duce the  decimal  of  the  pound,  .03184,  by  multiply- 
ing by  20  and  the  result  is  s.  0.63680.  Multiply  this 
decimal  by  12  and  it  gives  d.  7.64160.  The  answer, 
in  pound,  shillings  and  pence  is  £22  Os.  8d. 

To  find  the  advalorem  duty  on  importations  ex- 
pressed in  English  money,  the  value  of  the  goods 
being  £550  15s.  lid.,  and  the  duty  30  per  cent.  The 
decimal  of  the  above  value  is  £550.796.  Multiply  by 
$4.8665,  the  par  of  exchange,  gives  |2,680.4487340, 
the  cost  of  the  goods,  not  including  duty.  |2,680.45 
multiplied  by  30  per  cent,  gives  $804.1350  duty.  Add 
this  amount  to  $2,680.45  and  the  result  is  $3,484.57 
cost  of  goods  including  duty. 


APPENDIX. 


FOREIGN  EXCHANGE  ELUCIDATED. 

The  following  lecture,  delivered  June  5th,  1902,  by  Mr. 
H.  K.  Brooks  of  the  American  Express  Company,  before 
the  students  of  the  University  of  Chicago,  was  deemed  so 
appropriate,  as  illustrating  previous  chapters,  that  it  is 
published  verbatim: 

Foreign  exchange  transactions  are  generally  regarded  as 
being  quite  complicated,  and  although  there  are  some 
operations  requiring  experience  and  patient  study,  the  sys- 
tem, as  a  whole,  cannot  be  said  to  be  any  more  intricate 
than  any  of  the  problems  daily  arising  in  mercantile 
business. 

The  reason  of  there  being  so  few,  comparatively,  who 
have  a  thorough  knowledge  of  the  subject,  may,  perhaps, 
be  attributed  to  the  fact  that,  until  recent  years,  the  busi- 
ness was  confined  to  the  leading  banks  at  large  trade  cen- 
tres. Other  banks,  having  call  for  foreign  drafts,  letters  of 
credit  or  other  foreign  paper,  would  obtain  same  from  the 
large  banks  mentioned  or  refer  customers  to  them  direct. 

The  enormous  growth  of  our  import  business,  the  large 
increase  in  foreign  travel,  and  the  extension  of  our  trade 
to  nearly  every  country  of  the  world,  so  greatly  increased 
the  volume  of  foreign  exchange  transactions,  it  naturally 
invited  competition,  and  to-day  almost  every  bank  and 
financial  institution  at  a  place  of  any  importance  is  equip- 


154  FOREIGN  EXCHANGE. 

ped  with  the  facilities  necessary  to  meet  the  demand  for 
this  class  of  business  of  its  patrons. 

Merchants  who  formerly  imported  goods  from  foreign 
countries  through  brokers  at  seaport  cities,  now  have  for- 
eign departments  for  the  transaction  of  the  business  direct. 
Our  manufacturers,  who  formerly  did  not  think  of  looking 
beyond  the  limits  of  this  country  for  a  market  for  their 
goods,  have  learned,  through  a  better  knowledge  of  the 
conditions,  that  they  can  successfully  compete  with  foreign 
manufacturers.  Our  war  with  Spain  is  said  to  have  opened 
the  eyes  of  our  manufacturers  to  the  fact  that  there  was  a 
vast  population  outside  of  the  United  States  who  were  de- 
pendent for  many  commodities,  upon  countries  who  were 
in  no  better  position,  geographically  or  otherwise,  to  supply 
their  needs;  and  if  we  judge  from  the  large  increase  in  our 
exiK>rts  since  the  war,  there  was,  no  doubt,  some  foundation 
for  the  statement. 

In  an  article  recently  published  in  one  of  the  leading 
financial  papers — ''The  New  York  Financier," —  it  was 
stated  the  demand  among  bankers  and  large  mercantile 
houses  for  young  men  having  a  general  knowledge  of  for- 
eign exchange  and  foreign  shipping  very  greatly  exceeds 
the  supply — ^that  students  fitting  themselves  for  mercantile 
life  should  devote  as  much  study  as  possible  to  this  branch, 
since  it  would  be  a  very  valuable  acquisition  to  their  fitness 
for  the  present  commercial  business,  and  at  the  same  time, 
insure  a  higher  appreciation  and  greater  salary  for  their 
services  than  usually  paid  for  other  branches  of  either  mer- 
cantile or  banking  business. 

The  Term  "Foreign  Exchange." 
Foreign  exchange  is  a  system  by  which  commercial  na-^ 
tions  discharge  their  debts  to  each  other.  This  indebted- 
ness may  represent  the  value  of  commodities  exported  to 
or  imported  from  other  countries,  money  borrowed,  loaned, 
or  invested  abroad,  and  the  interest  or  profits  on  such 
funds.  The  cost  for  transportation  of  goods  and  the  com- 
missions for  service.    The  expense  incurred  in  traveling  in 


APPENDIX  155 

fc reign  countries.  In  fact  any  transactions  which  involve 
the  remitting  of  money  or  anything  representing  money 
from  one  country  to  another.  These  debts  have  to  be  paid, 
either  with  cash  or  something  equally  satisfactory  to  the 
creditors.  The  cost  of  transmitting  gold  or  currency  and 
the  risk  attending  same,  while  sometimes  resorted  to,  is 
generally  considered  too  great,  and  it  is  to  avoid  this  risk 
and  expense  that  the  system  of  exchanging  debts  through 
the  medium  of  commercial  paper  is  adopted. 

One  can  hardly  appreciate  the  magnitude  of  the  business 
between  the  United  States  and  foreign  countries,  which, 
directly  or  indirectly,  is  transacted  through  the  medium  of 
the  system  we  term  foreign  exchange,  without  resorting  to 
actual  data  in  the  shape  of  figures,  and  we  find  these  fig- 
ures so  large  as  to  be  almost  incomprehensible. 

For  the  twelve  months  ending  December  31st,  1901,  the 
value  of  the  goods  or  commodities  exported  from  this  coun- 
try to  other  countries  amounted  to  $1,465,500,000,  and  dur- 
ing the  same  period  the  United  States  imported  from  other 
countries  goods  to  the  value  of  $880,400,000,  making  a  total 
of  exports  and  imports  during  the  year  1901  of  $2,345,900,- 
000,  a  sum  which  if  in  $1  bills  fastened  together  at  their 
ends,  would  make  a  band  nearly  260,000  miles  long. 

The  value  of  the  goods  we  exported  exceeded  the  value 
of  those  imported  by  $585,100,000,  which  amount  of  credit 
in  our  favor,  would,  had  there  been  no  other  transactions 
to  offset  it,  have  to  be  remitted  to  us  from  the  various  for- 
eign countries.  But  against  this  credit  in  our  favor,  for- 
eign countries  charged  up  to  us  the  amount  paid  out  on  let- 
ters of  credit  used  by  our  people  to  meet  expenses  in  travel 
abroad — balance  due  on  loans  made  by  our  capitalists  to 
float  some  of  the  larger  enterprises,  such  as  railroad  con- 
solidations, the  United  States  Steel  Corporation,  etc.,  so 
that  notwithstanding  there  was  a  large  balance  due  us  in 
the  difference  between  the  value  of  the  goods  we  sold  to, 
and  those  we  purchased  from,  foreign  countries,  it  was  en- 
tirely offset,  and  more  too,  by  other  transactions.    In  fact, 


156  FOREIGN  EXCHANGE. 

during  the  year  1901  we  exported  $3,348,000  more  gold  than 
we  imported.  But  whether  the  balance  be  in  our  favor  or 
against  us,  the  total  amount  of  the  business  transacted  is 
practically  all  handled  through  the  medium  of  the  system 
we  call  foreign  exchange  and  the  importance  of  a  thorough 
knowledge  of  the  system  in  its  various  details,  is  becoming 
greater  each  year. 

The  Monetary  Systems  of  Foreign  Countries. 

A  knowledge  of  the  money  of  account  or  monetary  sys- 
tems of  the  various  foreign  countries  is  one  of  the  first 
things  necessary  to  a  clear  understanding  of  foreign  ex- 
change transactions. 

Paper  money,  such  as  government  and  bank  notes  and 
certificates,  are,  as  a  rule,  intended  solely  for  circulation 
within  the  country  in  which  issued,  and  are  not  legal  tender 
outside  of  the  country  in  which  they  emanate.  Of  course, 
paper  money  is  often  accepted  in  small  amounts  for  its  full 
face  Talue  in  other  countries,  but  it  is  always  optional  with 
the  creditor  in  accepting  it. 

Silver  and  minor  coins  are  also  intended  for  domestic  use, 
and  when  accepted  in  other  countries,  it  is  at  their  actual 
value  rather  than  at  their  face  value.  For  illustration:  The 
purchasing  power  of  the  silver  dollar  of  the  United  States 
within  this  country,  is  as  great  for  small  sums  as  the  gold 
dollar,  but  in  other  countries  it  would  only  be  accepted 
for  its  bullion  value.  The  Mexican  dollar,  which  passes 
for  its  face  value  in  Mexico,  is  worth  less  than  fifty  cents 
in  this  country. 

Gold,  by  virtue  of  commercial  usage  and  the  laws  of  the 
various  countries  of  the  world,  may  be  said  to  be  the  only 
international  money,  and  its  purchasing  power  is  practi- 
cally the  same  throughout  the  civilized  world.  But,  bear 
in  mind,  the  value  of  gold  coins  is  not  always  as  expressed 
on  their  face.  In  large  international  transactions  the 
weight  of  the  mass  is  regarded  and  not  the  number  of 
pieces,  and  their  value  depends  upon  the  weight  and  fine- 
ness.   By  fineness  is  meant  pure  metal.    Nearly  all  coins 


APPENDIX.  157 

contain  alloy  or  inferior  metal  which  is  added  to  increase 
their  durability. 

The  value  or  price  of  the  gold  money  of  account  of  com- 
mercial countries  is  determined  by  the  weight  and  fineness 
of  the  metal  contained  therein,  which  weight  and  fineness 
are  established  by  the  mint  laws  of  the  country  issuing  the 
money.  It  is  therefore  essential  that  the  standard  of  weight 
by  which  the  various  moneys  of  account  are  established 
shall  be  unvarying,  and  have  the  highest  legal  sanction; 
otherwise  there  could  be  no  stability  of  values  and  no  such 
thing  as  accurate  deductions  of  pars  of  exchange.  Gold  is 
the  only  commodity  in  the  world,  the  value  of  which  is 
established  by  law. 

Price  of  Gold. 

The  price  of  gold  cannot  be  affected  either  by  an  abund- 
ance or  scarcity  of  the  supply.  No  matter  how  large  the 
supply,  our  mints,  or  the  Bank  of  England,  will  buy  it  at 
the  price  established  by  law,  and  although  there  is  no  inter- 
national agreement  to  maintain  the  price,  the  fact  that  gold 
is  accepted  by  the  chief  commercial  nations  at  the  one  uni- 
versal measure  of  values,  operates  to  prevent  any  attempt 
to  change  its  valuation.  The  price  of  diamonds,  which  are 
more  valuable  than  gold,  is  affected  by  the  supply  and  de- 
mand. Silver,  used  extensively  as  money,  fluctuates  in 
price  like  any  commodity,  the  supply  and  demand  governing 
its  value. 

As  gold  shipments  between  the  United  States  and  for- 
eign countries,  particularly  Europe,  are  an  important  factor 
in  foreign  exchange  transactions,  it  may  interest  you  to 
know  how  they  are  handled  and  the  expense  attending  same. 

Whether  in  coined  pieces  or  bars  (bullion)  it  is  packed  in 
strong  kegs  or  boxes,  securely  strapped  with  hoop  iron,  and 
carefully  sealed  with  private  seals;  the  latter  to  discover  if 
tampered  with  en  route.  Space  is  chartered  from  the  steam- 
ship company,  as  in  the  case  for  merchandise,  although 
nearly  all  large  fast  steamers  have  rooms  especially  con- 
structed for  such  valuable  cargo.    At  a  cost  of  about  3-16  of 


158  FOREIGN  EXCHANGE. 

1  per  cent,  or  $1,875  for  each  million  dollars  in  value,  the 
shipper  has  it  insured  against  loss.  The  steamship  com- 
pany charge  for  carrying  the  shipment  as  freight,  a  rate  of 
about  Vs  per  cent,  of  its  value,  or  about  $1,250  for  each  mil- 
lion dollars,  making  a  total  cost  of  about  $3,125  per  million 
dollars.  As  an  extra  safeguard  in  case  of  large  shipments, 
the  steamship  company  details  special  armed  men  to  guard 
the  room  day  and  night,  and  sometimes  the  shipper  employs 
special  detectives  in  citizens  clothes  to  watch  the  passen- 
gers on  the  trip,  since  it  is  generally  known  several  days  in 
advance  when  large  shipments  of  gold  are  to  be  made. 

In  accordance  with  the  United  States  Mint  regulations  a 
charge  of  four  cents  per  $100  is  made  for  what  are  known 
as  commercial  bars  of  gold,  which  are  from  990  to  997 
thousandths  fine.  The  shipper  has  to  pay  for  these  bars 
with  gold  coin  which  is  obtainable  without  charge  at  Sub- 
Treasury  in  exchange  for  gold  certificates,  or  for  legal  ten- 
der notes.  There  is  no  restriction  upon  the  withdrawals  of 
gold  from  the  Sub-Treasury  for  export,  and  the  shipper  has 
the  option  of  taking  coined  pieces  if  he  prefers,  but  the  loss 
by  abrasion  of  coined  pieces  practically  equals  the  cost  of 
four  cents  per  $100  charged  by  the  mint  for  commercial 
bars,  which  are  put  up  in  that  shape  to  induce  exporters  to 
take  bars  instead  of  coined  pieces,  and  thus  save  the  gov- 
ernment the  cost  of  coinage  as  well  as  the  transportation  of 
the  bullion  to  the  mint. 

Money  of  Account  Foreign  Countries. 

I  shall  not  undertake  to  tell  you  the  names  and  denomi- 
nations of  all  the  coins  or  money  used  in  the  various  for- 
eign countries.  It  would  take  too  much  time,  and  you  would 
not  remember  them.  I  shall  simply  give  you  the  money  of 
account  of  the  principal  countries.  By  money  of  account 
we  mean  the  kind  of  money  in  which  the  people  keep  their 
accounts,  as  for  example,  we  keep  our  accounts  in  dollars 
and  cents. 

North  America. 

Commencing  with  North  America  we  have,  in  addition  to 


APPENDIX.  159 

the  United  States,  Canada,  Mexico,  Central  America  and  we 
will  include  the  West  Indies  Islands. 

Canada. 

Notwithstanding  Canada  is  a  British  Colony,  their  trade 
relations  with  the  United  States  were  too  important  to  ad- 
mit of  the  adoption  of  the  complicated  British  Monetary 
System,  and  they  keep  their  accounts  in  dollars  and  cents 
as  in  the  United  States.  No  gold  is  coined,  the  United 
Slates  "Gold  Eagle"  ($10.00)  and  the  British  "pound"  or 
"sovereign"  are  legal  tender  for  all  amounts. 

Mexico. 

Mexico's  money  of  account  is  the  Peso  or  dollar  of  100 
centavos  or  cents — worth  45  to  50  cents  in  our  money.  Be- 
ing one  of  the  chief  silver  producing  countries  of  the  world, 
the  greater  part  of  its  coinage  is  exported  to  China,  the 
Philippines  and  Central  and  South  America,  in  which 
countries  the  Mexican  Peso  or  dollar  is  the  favorite  coin. 
Central  American  States. 

The  Central  American  states  all  have  for  their  unit  of 
money  the  Peso  of  100  centavos — not  exactly  like  the  Mexi- 
can Peso,  but  more  like  the  Peso  of  the  South  American 
States,  which  is  similar  to  the  French  system — their  unit 
being  equal  to  about  five  francs. 

West  Indies  Islands. 

There  are  many  islands  comprising  the  group  known  as 
the  West  Indies  Islands.  Porto  Rico  as  you  know  is  owned 
by  the  United  States,  and  Cuba  until  recently,  practically 
controlled  by  us.  At  both  islands  efforts  are  being  made  to 
supplant  the  Spanish  peseta  with  the  American  dollar  as  the 
money  of  account.  Most  of  the  other  islands  are  posses- 
sions or  colonies  of  European  countries,  and  as  a  rule  keep 
their  accounts  in  the  money  of  their  mother  country. 
Soutli   America. 

South  America,  Uruguay,  Paraguay,  Argentine  Repub- 
lic, Columbia  and  Chili  use  the  Peso  of  100  centavos  as  in 
Central  America.  Brazil  uses  the  milreis  of  1,000  reis,  Peru 
the  sol  of  10  dineros,  each  dinero  being  equal  to  10  centavos 


160  FOREIGN  EXCHANGE. 

or  cents ;  Bolivia  calls  its  unit  the  boliviano  of  100  centavos, 
and  Ecuador  the  sucre  of  100  centavos.  The  value  of  their 
units  in  our  money  fluctuates,  but  is  approximately  fifty 
cents. 

In  drawing  drafts  on  Central  and  South  America  and  to 
some  extent  on  Mexico,  they  are  for  United  States*  dollars 
payable  in  New  York,  which  are,  of  course,  cashed  in  the 
money  of  the  country  where  payable,  at  the  current  rate  of 
exchange  on  New  York. 

Africa. 

In  Africa,  Egypt^s  money  of  account  is  the  Egyptian 
pound  of  100  piastres,  which,  although  of  greater  value  in- 
trinsically, is  worth  less  commercially  than  the  British 
pound  sterling.  Algeria  is  a  French  colony,  and  uses  the 
French  system,  and  the  same  is  true  of  Madagascar,  the 
third  largest  island  in  the  world. 

Cape  Colony,  Etc. 

Cape  Colony,  Natal,  Sierre  Leone  and  Zanzibar  are  Bri- 
tish Colonies  and  use  the  English  pound  sterling  as  their 
unit,  and  the  South  African  Republic  (or  Transvaal)  and 
Orange  Free  State,  where  the  English  are  having  an  inter- 
esting time  trying  to  whip  the  Boers,  do  likewise  to  facili- 
tate their  commerce  with  adjoining  states. 
Oceanica. 

In  Oceanica,  the  islands  of  Australia,  New  Zealand,  Tas- 
mania and  a  portion  of  Borneo  use  the  British  pound  ster- 
ling by  reason  of  being  British  colonies,  and  Java  and 
Sumatra,  colonies  of  Holland,  use  the  gulden  or  gilder. 

Japan. 

Japan's  money  of  account  is  the  yen  of  100  sen — which 
formerly  was  worth  about  $1,  but  in  1898  its  value  was  re- 
duced to  about  fifty  cents. 

Philippines. 

At  the  Philippines,  although  now  possessions  of  the 
United  States,  preference  is  given  to  the  Mexican  dollar  as 
formerly,  which  is  worth  in  our  money  from  forty-five  to 
fifty  cents,  according  to  the  market  price  for  silver. 


I  APPENDIX.  161 

India. 
India  or  British  India  witli  its  population  of  nearly  225 
millions — ^three  times  that  of  the  United  States — has  for  its 
money  of  account  the  rupee  of  16  annas — one  anna  being 
equal  to  four  pice  and  one  pice  equal  to  three  pie — not  "the 
kind  of  pie  our  mothers  used  to  make."  The  value  of  the 
rupee  in  our  money  is  about  33  cents.  India  being  a  very 
poor  country,  uses  coins  of  very  small  value,  the  smallest 
coin  (the  pie)  being  worth  about  ^4  cent  in  our  money. 

Hong  Kong. 
Hong  Kong  is  a  small  island  just  off  the  coast  of  China. 
Victoria,  the  capitol,  and  practically  the  only  place  there, 
has  a  population  of  nearly  200  thousand.  Most  of  the  trade 
of  China  with  the  rest  of  the  world  is  done  through  Victo- 
ria, or,  as  we  know  it  best,  Hong  Kong.  The  money  of  ac- 
count of  Hong  Kong  is  the  dollar  of  100  cents,  but  as  in 
other  oriental  countries,  the  Mexican  dollar  is  preferred  to 
the  local  currency. 

China. 

China  has  several  kinds  of  money — the  dollar  of  100 
cents — also  a  silver  coin  called  "tael,"  spelled  tael;  the 
latter  varies  in  value  according  to  the  locality  and  the  price 
of  silver  in  London.  But  the  Mexican  dollars  constitute 
the  principal  circulating  medium.  In  fixing  the  valuation 
of  the  Haikwan  tael  for  the  purpose  of  adjusting  the  Chinese 
indemnity — ^resulting  from  the  recent  war  there,  the  pleni- 
potentiaries made  the  equivalent  in  American  money  74  and 
2-10  cents. 

Like  India,  China  is  a  very  poor  country,  and  the  coins 
most  extensively  used  are  of  very  small  value.  They  have 
a  coin  called  "cash" — about  the  size  of  our  silver  quarter 
(25  cent  piece)  made  of  copper  and  zinc,  with  a  squaro  hold 
in  the  center — I  suppose  you  have  seen  them.  One  thous- 
and of  these  are  issued  on  a  string — ^that's  what  the  hole  is 
for — ^the  lot  being  equivalent  to  about  $1  in  our  money,  or 
1-10  of  a  cent  each. 


162  FOREIGN  EXCHANGE. 

Europe. 

I  have  now  given  you  a  general  idea  of  the  kinds  of  money 
in  use  in  the  countries  of  North  and  South  America,  Asia, 
Africa  and  principal  islands  of  the  Atlantic  and  Pacific 
Oceans.  We  now  come  to  Europe — with  which  our  finan- 
cial and  trade  relations  are  of  more  importance  than  all 
the  others  combined. 

France,  Belgium,  Switzerland,  Italy,  Etc. 

France,  Belgium,  Switzerland,  Italy,  Greece,  Spain,  Rou- 
mania,  Servia,  Bulgaria,  Finland  and  Austria  Hungary  have 
the  same,  or  very  similar,  monetary  systems — the  first  five 
countries  named  comprising  what  is  known  as  the  "Latin 
Union  countries" — a  union  formed  for  the  adoption  of  a  uni- 
form monetary  system.  The  other  countries  adopted  the 
same  system,  but  are  not  members  of  the  Union. 

France,  Belgium  and  Switzerland  call  their  unit  the 
franc,  which  is  divided  into  100  centimes.  Italy  calls  the 
franc,  or  unit,  the  lira  of  100  centesimi.  Greece  uses  the 
unit  named  dracma  of  100  lopta.  Spain  the  peseta  of  100 
centimes;  Roumania  the  lei  of  100  bani;  Servia  the  dinar 
of  100  paras;  Bulgaria  the  ?ew  of  100  stotinkas;  Finland 
the  finmark  of  100  cents,  and  Austria-Hungary  the  crown 
or  kronen  of  100  heller.  All  these  units  are  practically  the 
same  as  the  franc  of  France  with  different  names — their 
actual  mint  valuation  (except  Austria-Hungary)  being  just 
the  same,  19.3  cents. 

Germany. 
Germany's  money  of  account  is  the  reich-mark,  or  mark, 
as  wo  call  it,  of  100  pfennige;  a  mark  is  worth  about  twen- 
ty-four cents  in  our  money. 

Norway,  Sweden,  Denmark. 
Norway,  Sweden  and  Denmark,  known  as  the  Scandina- 
vian countries,  have  for  their  unit  the  kroner  or  crown  of 
100  ores — its  value  in  our  money  being  about  twenty-seven 
cents. 


APPENDIX.  166 

Holland. 

Holland  has  the  gulden  or  guilder  of  100  cents,  worth 
about  forty  cents  in  our  money. 

Russia. 

Russia  uses  for  its  unit  the  ruble  of  100  kopecks,  worth 
about  fifty-two  cents  in  our  money. 
Portugal. 

Portugal,  like  Brazil,  has  for  its  unit  the  milries — equal  to 
1,000  reis — its  value  in  our  money  being  about  $1.08. 
Great  Britain. 

Foremost  among  all  nations  of  the  earth  in  the  magni- 
tude of  its  commerce,  its  vast  colonial  possessions  and  de- 
pendencies, consequently  its  importance  as  the  chief  finan- 
cial center.  Great  Britain  furnishes  the  most  interesting 
study  of  the  money  of  the  world.  Every  school  child  can 
tell  you  the  money  of  account  of  Great  Britain.  What 
possessed  them  to  adopt  such  a  complicated,  cumbersome 
system,  is  a  mystery  to  nearly  every  one.  The  pound  ster- 
ling is  equal  to  twenty  shillings,  each  shilling  being  equal 
to  twelve  pence,  and  each  pence  equal  to  four  farthings. 
Without  exception  the  sovereign  is  the  most  universally 
recognized  coin,  and  except  the  Egyptian  pound,  it  is  the 
largest  of  units  of  money.  Its  actual  value  in  our  money 
is  about  $4.87. 

Probably  more  foreign  exchange  is  drawn  in  sterling- 
here  and  in  other  countries  as  well — than  in  the  monies  of 
all  other  countries  combined.  This  is  due,  however,  to  the 
fact  that  London  is  the  financial  center  of  the  world,  and 
exchange  on  that  city  is  generally  acceptable,  if  not  pre- 
ferred. For  the  same  reason  probably  90  per  cent,  of  all 
letters  of  credit  issued  throughout  the  world,  are  drawn  in 
English  money. 

Rate  of  Exchange. 

The  term  "rate  of  exchange"  means  the  value  or  the  price 
of  the  money  of  one  country  reckoned  in  the  money  of  any 
other  country — the  value  being  a  fixed  rate  of  exchange — 
the  price  a  fluctuating  rate  of  exchange. 


164  FOREIGN  EXCHANGE. 

The  rate  of  exchange  quoted  between  any  two  countries 
is  for  drafts,  checks  or  bills  of  exchange,  and  the  price  in- 
cludes, besides  the  actual  equivalent  of  the  standard  coin, 
some  allowance  for  interest  according  to  the  tenor  of  the 
draft,  and  a  premium  which  the  seller  demands  for  the 
economy  and  superior  conveniences  of  his  draft  or  check  as 
compared  with  a  remittance  in  currency  or  bullion.  This 
premium,  which  represents  the  fluctuation,  is  more  or  less 
according  to  the  amount  of  exchange  in  the  market  for  sale 
and  the  demand  for  same. 

Two  Kinds  of  Exchange. 
There  are  two  kinds  of  exchange — direct  and  arbitrated. 
Direct  is  when  between  any  two  countries,  arbitrated,  when 
between  two  places  in  different  countries,  through  the  me- 
dium of  some  other  place  in  another  country — or,  to  express 
it  more  clearly — the  remitting  of  money  to  one  country 
through  another  country  or  the  buying  of  exchange  of  one 
country  through  another. 

The  occasion  for  the  arbitration  of  exchange  will  arise 
when  the  rate  of  exchange  here  direct  upon  a  country  to 
which  you  wish  to  remit  is  much  higher  than  between  that 
country  and  another  country  nearby.  For  illustration: 
Through  the  financial  columns  of  our  daily  papers,  or  by 
cabled  information  direct  the  rate  for  a  check  in  London 
on  Paris  or  Berlin,  or  vice  versa,  is  furnished.  It  generally 
reads  for  example  this  way — "Exchange  on  Paris  F.  25.12 — 
Exchange  on  Berlin  M.  20.42."  This  signifies  you  can  buy 
in  London  for  instance,  a  check  payable  in  Paris  at  the  rate 
of  25  francs  12  centimes  per  pound  sterling,  or  on  Berlin 
at  the  rate  of  20  marks  42  pfennige  per  pound  sterling. 
Therefore,  if  you  had  occasion  to  remit  a  large  sum  to  say 
Bierlin,  and  you  found  you  could  buy  a  check  on  London 
and  have  the  amount  remitted  from  London  to  Berlin 
cheaper  than  you  could  remit  to  Berlin  direct,  the  trans- 
action would  be  termed  "arbitration  of  exchange."  All 
large  banking  houses  and  jobbers  of  foreign  exchange  watch 
the  quotation  on  exchange  between  countries  very  closely, 


APPENDIX.  166 

and  always  avail  themselves  of  any  advantage  to  be  gained 
by  remitting  to  one  country  through  another. 

Fluctuation  in  Rate  of  Exchange. 

The  fluctuation  in  the  price  of  exchange,  or,  sua  it  is 
termed,  **the  rate  of  exchange,"  is  dtie  to  a  number  of 
causes.  If  the  value  of  the  goods  we  exported  greatly  ex- 
ceed the  value  of  the  goods  we  imported  during  a  certain 
period,  the  large  balance  due  us  from  other  countries 
would,  if  there  were  no  other  international  transactions  to 
offset  same,  cause  the  price  of  exchange  here  to  be  lower, 
for  the  reason  there  would  be  less  demand  for  remittance 
to  foreign  countries,  since  it  is  always  the  difference  be- 
tween the  debits  and  credits  that  is  remitted.  On  the 
other  hand,  if  we  owed  foreign  countries  a  much  greater 
amount  than  they  owed  us,  exchange  here  would  be  higher 
by  reason  of  increased  demand  for  it. 

But  it  is  not  alone  our  foreign  commercial  trade  that 
regulates  the  price  of  exchange.    The  monetary  conditions 
here  and  abroad  may  entirely  offset  other  conditions.. 
Rates  for  Money. 

When  the  loaning  rate  for  money  here  is  high,  capitalists 
and  bankers  will  loan  their  money  here,  instead  of  invest- 
ing in  foreign  commercial  bills,  which  causes  less  demand 
for  the  bills,  hence  lower  rates.  If  rates  for  money  abroad 
are  high,  there  will  be  a  greater  demand  for  commercial 
bills  or  other  exchange  on  foreign  countries,  for  the  pur- 
pose of  getting  their  money  to  those  countries  to  take  ad- 
vantage of  such  high  rates,  thereby  causing  higher  rates. 
If  the  rates  for  money  abroad  are  lower  than  here,  as  was 
the  case  during  nearly  all  of  the  year  1901,  our  capitalists 
and  bankers  would  borrow  money  in  their  markets  for  in- 
vestment here,  thus  increasing  our  indebtedness  to  foreign 
countries,  and  when  such  loans  became  due,  there  would  be 
an  increased  demand  for  exchange  to  pay  same,  resulting 
in  higher  rates. 

Discount  Rates. 

The  discount  rates  at  London,  Paris,  Berlin  and  other 


166  FOREIGN  EXCHANGE. 

European  centers  very  materially  affect  the  buying  and 
selling  price  for  commercial  bills  drawn  against  commodi- 
ties exported.  These  discount  rates  are  the  rate  per  cent, 
at  which  commercial  paper  of  the  different  classes  may  be 
discounted — that  is  the  allowance  made  for  cashing  or  tak- 
ing up  the  paper  before  maturity  or  before  due  and  payable. 
These  discount  rates  fluctuate  according  to  the  conditions 
prevailing  as  does  the  rate  of  exchange.  When  discount 
rates  abroad  are  high  the  rate  for  commercial  bills  here 
will  be  lower,  and  when  low  abroad  the  rate  for  commer- 
cial bills  here  will  be  higher. 

Under  normal  conditions  the  rates  for  foreign  exchange 
fluctuate  between  what  are  termed  gold  exporting  or  gold 
importing  points,  which  means  the  actual  cost  of  the  gold 
plus  the  cost  of  transporting  it  from  one  point  to  another. 
For  example:  If  you  wished  to  remit  say  to  London  the 
equivalent  of  £50,000  (or  approximately  $250,000),  and  you 
found  that  the  cost  of  the  gold  coin  or  bullion  and  the  ex- 
pense of  freight,  insurance,  commissions,  etc.,  would  be 
considerably  less  than  the  cost  of  a  draft  or  check  for  the 
amount  on  London,  then  you  would  ship  gold  in  preference. 
If  the  cost  were  equal  or  greater  for  shipping  gold,  then 
you  would  remit  by  check,  as  it  would  be  more  convenient 
and  less  risk,  therefore  the  rates  naturally  do  not  go  much 
above  or  much  below  the  gold  points. 

When  the  rate  for  demand  sterling  exchange  gets  down 
to  say  $4.83%  to  $4.84  per  pound,  it  is  cheaper  to  import 
gold.    If  such  exchange  reaches  as  high  as  4.881/4  to  4.88% 
per  pound,  then  gold  can  be  exported  equally  cheap. 
Supply  and  Demand. 

But  notwithstanding  these  various  conditions  which  af- 
fect the  market  price  for  foreign  exchange,  it  is  the  supply 
and  demand  that  regulates  the  price,  as  in  the  case  of 
wheat,  corn,  or  any  commodity. 

Par  of  exchange  means  equal  of  exchange.  There  Is  a 
mint  par  of  exchange,  and  also  what  might  be  termed  a 
"commercial  par  of  exchange." 

The  "mint  par  of  exchange"  between  the  United  States 
and  foreign  countries  is  the  actual  value  in  our  money  of 
the  pure  metal  contained  in  the  coins  representing  the 
units  of  money  of  the  various  countries.  The  director  of 
the  United  States  Mint  is  required  at  stated  periods  in  each 
year  to  proclaim  the  values  of  these  coins  or  units  in  our 
money  for  the  purpose  of  computing  the  worth  of  importa- 
tions of  goods  and  also  the  amount  of  customs  duties  asses- 
sable thereon.  The  value  of  gold  coins  as  fixed  by  the  di- 
rector of  the  mint  rarely  ever  change,  since  the  weight  and 


APPENDIX.  167 

fineness  of  the  gold  units  of  countries  are  fixed  by  law — in 
the  United  States  by  Act  of  Congress,  in  Great  Britain  by 
Act  of  Parliament. 

The  mint  par  of  exchange  of  the  English  pound  or  sover- 
eign in  our  money  is  $4.8665,  of  the  French  franc  and  the 
franc  of  Latin  union  countries  19.3  cents,  of  the  German 
mark  23.8  cents,  of  the  Scandinavian  kroner  26.8  cents,  and 
of  the  Holland  gulden  or  guilder  40.2  cents,  and  for  many 
years  it  has  been  the  same.  While  these  values  as  fur- 
nished are  not  exactly  correct,  they  are  sufficiently  accurate 
to  serve  the  purpose  intended  and  are  accepted  for  all  com- 
putations at  the  Custom  Houses. 

How  to  Find  Pars  of  Exchange. 

To  determine  the  actual  mint  par  of  exchange  between 
any  two  countries,  it  is  only  necessary  to  divide  the  weight 
of  the  pure  gold  in  the  gold  unit  of  the  one  country  by  the 
weight  of  the  pure  gold  in  the  coin  of  the  other  country. 
The  mint  par  of  exchange  between  the  United  States  and 
countries  having  silver  monetary  units  is  arrived  at  in  the 
same  way,  but  as  the  price  of  silver  fluctuates,  the  value  of 
silver  coins  frequently  change. 

Illustration  Between  United  States  and  Great  Britain. 

As  an  illustration  of  how  the  pars  of  exchange  are  ar-  - 
rived  at,  we  will  take  for  example  the  mint  par  of  exchange 
between  the  United  States  and  Great  Britain.  Our  gold  dol- 
lar (which  is  our  unit  or  money  of  account)  weighs  gross 
25.8  troy  grains  and  is  9-10  fine,  1-10  alloy  being  allowed 
to  increase  its  durability,  which,  if  deducted  leaves  23.22 
troy  grains  of  pure  gold.  The  sovereign  contains  gross 
123.274478  troy  grains,  and  is  11-12  fine,  which  leaves  the 
pure  gold  in  the  sovereign  113.001603  troy  grains,  which,  if 
divided  by  23.22,  the  pure  gold  in  the  United  States  dollar, 
gives  $4.866560,  the  mint  par  of  exchange. 

If  you  divide  the  value  of  the  sovereign  ($4.8665)  by  20 
(there  being  20  shillings  to  the  pound),  it  will  give  you  the 
actual  value  of  the  shilling  in  our  money,  or  if  you  divide  it 
by  240,  the  number  of  pence  to  the  pound,  it  will  give  you 
the  value  of  the  penny  in  our  money  (a  fraction  over  2 
cents). 

Commercial  Par  of  Exchange. 

Now,  as  to  the  commercial  par  of  exchange,  if  you  add  to 
the  mint  par  of  exchange  between  two  countries,  the  cost 
of  transferring  the  coin  or  bullion,  which  involves  freight 
charges,  insurance,  interest,  commissions,  and  sometimes 
discounts,  you  will  arrive  at  what  would  be  termed  under 
normal  conditions,  the  "commercial  par  of  exchange,"  or, 


168  FOREIGN  EXCHANGE. 

the  amount  necessary  to  discharge  a  debt  of  a  merchant  in 
one  country  to  a  merchant  in  another  country. 

In  further  illustration  of  the  commercial  par  of  exchange, 
if  the  United  States  owed  England  exactly  the  same  amount 
England  owed  us,  the  debts  between  these  two  countries 
could  be  paid  without  the  intervention  of  money,  and  the 
commercial  price  of  exchange  would  be  at  par.  If,  however, 
we  owed  England  a  greater  amount  than  they  owed  us,  ex- 
change here  would  be  higher,  and  in  England  lower,  and 
vice  versa.  In  other  words,  exchange  in  the  United  States 
would  be  at  a  premium,  and  in  England  at  a  discount,  the 
premium  in  one  case  being  about  equal  to  the  discount  in 
the  other. 

Quotations  for  foreign  exchange,  such  as  checks,  drafts, 
commercial  bills,  etc.,  are  rarely  understood  except  by  those 
familiar  with  the  business. 

Quotations  for  Foreign  Exchange. 

In  quoting  the  rate  of  exchange  for  drafts,  checks,  etc., 
on  countries  other  than  France,  Germany,  and  sometimes 
Italy,  the  rate  quoted  is  per  single  unit,  that  is,  so  much  in 
our  money  per  pound  sterling  on  England,  kroner  on  Nor- 
way, Sweden  and  Denmark,  ruble  on  Russia,  etc.  Exchange 
on  France  and  Germany  when  quoted  by  dealers  at  smaller 
places,  would  be  the  same,  so  much  per  single  franc  or 
mark,  but  in  the  larger  cities,  it  is  the  custom,  when  quot- 
ing rates  for  francs,  to  quote  the  number  of  francs  and  cen- 
times that  will  be  allowed  per  $1,  as  for  example  5.15% — 
meaning  that  for  each  $1  you  would  be  allowed  5  francs, 
15%  centimes.  On  Germany  the  quotation  would  be  for  four 
marks  instead  of  one.  For  example,  95  5-16 — meaning  that 
for  each  four  marks  you  would  have  to  pay  95  5-16  cents. 
The  allowance  of  %  of  a  centime  per  $1,  considering  that 
one  whole  centime  is  worth  only  1-5  of  a  cent  in  our  money, 
and  a  fraction  like  5-16  of  a  cent  in  our  money  on  four 
marks,  no  doubt  seems  to  you  like  a  very  small  item,  but 
on  a  transaction  of  100,000  francs  (about  $19,400  our  money) 
%  of  a  centime  per  dollar  would  make  a  difference  of  over 
$28,  and  5-16  of  a  cent  per  four  marks  on  100,000  marks 
(about  $24,800),  would  be  a  difference  of  over  $78,  or  over 
$15  on  each  1-16  of  a  cent. 

French  Quotations. 

One  peculiarity  in  the  French  quotations  is  that  the  rate 
is  always  advanced  or  lowered  by  %  of  a  centime;  for  illus- 
tration, the  next  lower  rate  to  5.15  would  be  5.15%,  then 
5.16 iy4,  5.16%,  5.17%,  etc.,  there  being  just  %  between  each 
quotation.    Bear  in  mind  the  greater  the  number  of  francs 


APPENDIX.  169 


and  centimes  allowed  per  dollar,  the  lower  would  be  the 
rate,  since  as  the  quotation  is  per  $1,  the  more  francs  you 
would  receive  for  your  money.  One  reason  assigned  for 
this  method  of  quoting  the  French  franc,  which  is  the  re- 
verse of  that  in  other  kinds  of  exchange,  is  that  %  of  a  cen- 
time is  equivalent  to  Vs  of  1  per  cent,  in  the  pound  sterling, 
and  as  most  of  the  French  exchange  was  formerly  covered 
or  paid  through  English  exchange,  this  method  served  a 
convenience  in  figuring.  The  other  reason,  which  is  given 
by  "The  Financier"  of  New  York  is,  that  as  there  are  5 
francs  to  the  dollar,  Vs  of  1  per  cent,  on  one  franc  would 
call  for  %  of  1  per  cent,  on  5  francs,  the  equivalent  of  $1. 

But  these  quotations  on  francs  by  %  of  a  centime,  though 
they  served  every  purpose  a  few  years  ago,  are  not  now 
sufficiently  close  to  meet  the  competition  of  the  present 
day,  and  are  supplemented  with  fractional  quotations  such 
as  +515%— 1-32,  or  515  5-5—1-16,  or  515%+l-32,  etc.  These 
plus  or  minus  fractions  do  not  apply  directly  to  the  rate, 
but  mean  1-32,  1-16,  3-32,  etc.,  of  1  per  cent,  plus  or  minus 
the  equivalent  amount  in  American  money,  which  is  added 
or  deducted,  as  the  case  may  be. 

In  a  publication  entitled  "Foreign  Exchange,"  recently 
issued  by  myself,  furnishing  conversion  tables  for  foreign 
exchange  transactions,  I  have  undertaken  to  have  adopted 
a  method  for  quoting  on  French  exchange,  that  would  do 
away  with  those  confusing  fractiona,i  quotations,  by  supply- 
ing conversion  tables  for  francs,  the  equivalent  of  $1  by 
eights  of  a  centime.  For  example:  instead  of  jumping  from 
5.15  to  5.15%,  which  would  now  be  the  next  lower  quota- 
tion, the  tables  in  this  book  are  for  5.15,  5.15 1^,  5.15 1^, 
5.15%,  5.151/^  and  then  5.15%,  which  practically  serve  the 
same  purpose,  and  avoid  the  complicated  figuring  of  the 
fractions,  plus  or  minus  1-32,  1-16  or  3-32,  etc.,  or  1  per  cent, 
mentioned,  and  I  look  for  its  general  adoption  in  the  near 
future. 

German  Exchange  Fractional  Quotation. 

Quotations  for  German  exchange,  v/here  quoted  for  4 
marks  instead  of  a  single  mark,  are  also  supplemented  by 
the  plus  or  minus  fractional  quotations,  as  for  example:  If 
95  5-16  per  4  marks  was  thought  a  little  too  high,  it  will  be 
quoted  95  5-16  minus  1-32  of  1  per  cent.,  which,  on  a  trans- 
action of  100,000  marks  would  make  a  difference  of  about 
$7.50. 

In  large  transactions  the  quotations  on  English  exchange 
(which  are  generally  confined  to  eighths  of  a  cent  per 
pound),  are  often  supplemented  with  the  quotation  plus 
1.00,  which  means  $1  additional  will  be  charged  on  each 


170  FOREIGN  EXCHANGE. 

1,000  pounds,  making  a  difference  of  10  points  in  the  rate. 
That  is,  a  quotation  of  4,87i/4  plus  1.00  would  be  $4.8735, 
and  it  is  not  unusual  in  very  large  transactions  to  advance 
or  lower  the  rate  by  5  hundredths  of  a  cent  per  pound,  such 
as  4.87—4.8705—4.8710,  4.8715,  etc.,  each  five  hundredths  of 
a  cent  per  pound  making  a  difference  of  $5  on  each  10,000 
pounds,  or  $250  on  a  transaction  of  500,000  pounds  (nearly 
2^  million  dollars  in  our  money),  often  made  by  large  finan- 
cial institutions  in  a  single  day. 

Newspaper  Quotations  on  Foreign  Exchange. 

I  have  here  a  clipping  from  the  Chicago  Daily  Tribune, 
quoting  the  rates  for  ''foreign  exchange."  Under  the  head- 
ing "Foreign  Exchange  Market"  it  starts  in  by  saying  "for- 
eign exchange"  closed  steady  at  the  following  rates." 
"Steady"  means  a  fair  demand  and  prices  likely  to  remain 
as  they  are.  "Firm"  would  mean  good  demand  with  prices 
tending  upward;  "strong,"  a  large  demand  with  prices  cer- 
tain to  go  higher.  "Dull"  or  "weak"  would,  of  course,  mean 
very  little  or  no  demand,  with  prices  tending  lower. 

Under  the  head  of  "selling"  rates  it  gives: 

Cable  transfers,  London 4.88 

Checks,  London  4.87% 

Checks,  Paris    5.161^+1-32 

Checks,  Berlin 95  7-16 

Checks,  Holland 40i4 

Selling  rates,  in  this  case,  mean  the  prices  that  were 
charged  customers  who  wished  to  remit  abroad. 

The  first  item,  "cable  transfers,"  is  where  amount  of 
money  desired  to  be  paid  abroad  is  deposited  here,  and  the 
bank  or  concern  with  whom  you  are  transacting  the  busi- 
ness cables  its  correspondent  abroad  to  pay  the  amount  to 
the  person  ai  the  address  you  designate.  Of  course,  it 
would  be  necessary  for  those  making  such  transfers  to  have 
funds  or  credit  abroad  for  such  purpose.  Where  it  is  de- 
sired to  have  money  paid  at  interior  places,  the  cablegram 
will  be  sent  to  the  nearest  city  at  which  the  bank  or  con- 
cern here  has  funds,  and  it  will  be  forwarded  by  mail  from 
there,  causing  a  delay  of  perhaps  only  a  few  hours.  Ordi- 
narily, within  one  or  two  hours  from  the  time  you  deposit 
the  money  here  it  will  be  paid  to  the  person  abroad  whom 
you  designate. 

The  quotations  for  checks  London,  checks  Paris  and 
checks  Berlin,  are  the  rates  at  which  they  would  have  sold 
you  a  demand  check  or  draft  payable  at  those  particular 
cities.  If  you  had  wanted  a  check  payable  at  some  other 
point  in  Great  Britain,  France  or  Germany,  they  undoubt- 
edly would  have  charged  you  a  higher  rate,  since  their 


APPENDIX.  171 

balances  are  kept  only  at  principal  trade  centers,  and  their 
arrangements  for  payment  of  their  paper  at  interior  or 
other  points  are  that  the  bank  correspondents  there  will 
honor  their  paper  and  reimburse  themselves  by  drawing 
upon  the  trade  centers  for  the  amount  plus  their  commis- 
sion for  cashing,  hence  adding  to  the  cost  of  performing 
the  service. 

The  next  item  is  "checks  Holland  40i/4."  This  means  they 
would  charge  for  a  check  or  draft  on  any  point  in  Holland 
at  the  rate  of  40%  cents  per  gulden  or  guilder,  the  money 
of  that  country. 

Following  the  above  there  appears  in  this  clipping  the 
heading,  "Buying  Rates,"  which  means  the  rates  at  which 
the  banks  purchased  the  various  classes  of  commercial 
paper  named.    The  quotations  are  as  follows: 

60  days  London  bankers 4.84i;4 

60  days  London  documentary 4.84^ 

3  days  Antv/erp 5.18%~l-32  -i-* 

3   days  Hamburg 95i/4  +1-32 

60  days  Holland 39  15-16 

London   Exchange. 

The  first  quotation,  "60  days  London  bankers  4.84%,"  is 
for  drafts  drawn  by  bankers  payable  60  days  after  sight 
(meaning  after  acceptance  abroad),  against  their  account 
in  a  bank  upon  which  draft  is  drawn.  The  banker  issuing 
such  draft  has  60  days  (if  necessary)  in  which  to  place 
funds  abroad  to  meet  payment  of  this  draft,  therefore  a 
bank  will  often  sell  its  60  day  draft  with  the  belief  that  it 
will  be  able  to  purchase  and  place  the  amount  abroad  to 
meet  same  before  draft  is  due,  at  a  lower  rate  than  at  which 
it  sold,  and  thus  make  a  profit.  There  are  other  cases 
where  a  bank  will  sell  its  60  day  draft  on  the  market  to  ob- 
tain the  use  of  the  money  for  that  period. 

The  next  item,  "60  days  London  documentary  4.84^/^,"  is 
what  is  known  as  a  foreign  commercial  bill  of  exchange, 
which  I  will  explain  more  fully  later.  The  documents  refer- 
red to  are  the  bills  of  lading  and  the  insurance  certificates, 
representing  a  shipment  of  goods  abroad.  The  draft  is 
drawn  payable  60  days  after  sight,  which  is  the  time  credit 
extended  to  purchaser  by  the  seller.. 

The  3  day  quotations  mentioned  on  Antwerp  and  Hamburg 
are  for  drafts  payable  three  days  after  sight.  The  custom 
of  drawing  drafts  three  days  after  sight  on  points  in  Euro- 
pean countries  outside  of  Great  Britain,  is  because  no  days 
of  grace  a^-e  allowed  on  the  Continent  as  in  Great  Britain, 
and  the  three  days  are  granted  to  Insure  payment  being 


|V 


172  FOREIGN  EXCHANGE. 

made,  and  thus  avoid  "protest  fees,"  which  often  are  very 
exorbitant. 

The  sixty  days  Holland  bills  are  issued  and  paid  under 
practically  the  same  conditions  as  the  sixty  days  London 
bankers  just  mentioned,  although  drav/n  against  commodi- 
ties exported.  They  are  what  is  termed  "Clean  Bills,"  by 
reason  of  there  being  no  documents  attached. 

Discount  Rates,  London,  Paris,  Berlin. 

I  have  also  clipped  from  the  paper  the  following  items 
which  pertain  to  foreign  exchange  transactions:  Under 
the  head  of  "Money  Markets  of  the  World,"  it  reads,  dis- 
counts at  London  2%  per  cent.,  Paris  2  7-16  per  cent,  Berlin 
1%  per  cent.  Foreign  discount  rates  mean  the  rate  per 
cent,  charged  or  allowed  on  drafts  discounted  or  paid  be- 
fore due.  These  particular  rates  mentioned  apply  to  drafts 
drawn  on  bankers. 

Here  is  also  another  newspaper  clipping:  "Sterling  ex- 
change— posted  rates  4.88,  actual  rates  4.87^,  documentary 
rates  4.84.  Posted,  or  nominal  rates  are  those  posted  daily 
on  bulletins  of  leading  New  York  dealers  in  exchange  for 
use  of  the  general  public,  and  applj^  more  particularly  to 
smaller  sums.  Actual  rates  are  inside  terms  made  to  bro- 
kers or  large  buyers  for  large  sum-s.  Documentary  rates 
are  for  commercial  bills  of  exchange. 

New  York  Exchange. 

Here  is  another  newspaper  quotation,  which,  while  not 
applying  directly  to  foreign  exchange,  materially  affects 
the  rates  for  same  in  the  Western  market:  New  York  ex- 
change— 30  cents  discount  before  clearings,  40  cents  dis- 
count after  clearings.  The  expressions,  before  and  after 
clearings,  mean  before  or  after  the  meeting  of  the  bank 
clearing  house,  a  meeting  held  each  day  about  11  A.  M.  by 
representatives  of  the  different  banks  to  exchange  debits 
and  credits  with  each  other.  New  York  exchange  means 
checks  payable  by  a  bank  in  New  York.  30  cents  discount 
in  this  case,  would  mean  that  New  York  exchange,  in  sales 
between  banks  (not  as  a  rule  with  the  public),  a  check 
would  be  sold  at  a  discount  of  3U  cents  per  each  $1,000.  If 
New  York  exchange  were  quoted  at  a  premium  of  30  cents, 
they  would  charge-  30  cents  additional  per  $1,000.  The 
I  reason  the  rates  for  New  York  exchange  affect  the  rates 
-—J  for  foreign  exchange  in  the  West,  is  that  the  rates  in  the 
West  and  elsewhere  in  the  United  States  are  based,  or,  I 
might  say,  controlled,  by  the  rates  in  New  York,  because 
New  York  is  the  principal  buying  market,  therefore  if  New 
York  exchange  here  is  at  a  discount,  on  large  transactions 


1 


i  APPENDIX.  173 

banks  would  sell  you  a  draft  on  London  or  other  foreign 
cities  at  rate  of  30  cents  per  $1,000,  less  than  you  could  buy 
it  in  New  York,  or  if  at  a  premium  the  rate  would  be  that 
much  per  $1,000  higher  than  New  York  rates,  providing  of 
course  you  paid  in  cash  or  local  funds. 

Foreign  Commercial   Bills  of  Exchange. 

The  basis  of  a  foreign  bill  of  exchange  is,  as  its  name 
implies,  a  commercial  transaction  of  international  charac- 
ter, which  consists  in  the  purchase  of  goods  or  commodities 
in  one  country  for  export  to  another  country.  The  draft 
represents  the  money  value  of  the  goods  which  is  due  the 
exporter.  The  bill  of  lading  is  the  contract  between  the 
transportation  company  and  the  shipper  for  the  carrying  of 
the  goods  and  also  serves  as  the  order  for  their  delivery. 
The  insurance  certificate  is  the  certification  of  the  Marine 
Insurance  Company  of  reimbursement  in  case  goods  are 
lost  by  fire  or  accident  while  en  route  on  the  ocean.  These 
three  documents — the  draft,  bill  of  lading  and  insurance 
certificate,  comprise  what  is  termed  a  foreign  commercial 
bill  of  exchange.  They  are  almost  invariably  issued  in 
duplicate  for  fear  one  set  may  be  lost  in  its  transmission 
abroad  by  mail — one  of  each  set  being  marked  original,  the 
other  duplicate — or  sometimes  one  of  the  drafts  will  read 
**First  of  Exchange,"  the  other  ''Second  of  Exchange."  For- 
eign commercial  bills  of  exchange  are  also'  known  as  "docu- 
mentary bills  of  exchange,"  by  reason  of  the  bill  of  lading 
and  insurance  certificate  accompanying  the  draft.  It  is 
customary  to  send  the  originals  of  the  three  documents  by 
first  steamers,  the  duplicates  or  seconds  by  following  steam- 
er. If  the  original  set  is  lost,  the  duplicate  will  serve  the 
same  purpose. 

Similarity  of  Domestic  and   Foreign  Trade. 

Trade  between  countries  may  be  said  to  be  conducted  in 
a  manner  somewhat  similar  to  that  employed  here  between 
cities  or  towns,  except  that  the  method  of  payment  or  re- 
imbursement to  the  shipper  necessarily  differs  by  reason 
of  greater  distance,  the  difference  in  kind  of  money  used, 
and  commercial  customs  in  the  two  countries.  To  obtain 
payment  for  goods  shipped  to  a  foreign  country  which  per- 
haps would  not  arrive  at  destination  for  several  weeks  and 
possibly  months,  according  to  distance,  and  whether  by  fast 
or  slow  steamer,  to  say  nothing  of  the  fact  that  to  some 
countries  steamers  only  leave  our  ports  semi-monthly  or 
monthly,  it  is  the  usual  custom  of  the  shipper,  whom  we 
term  the  exporter,  to  sell  his  commercial  bill  of  exchange 
against  the  shipment  in  advance  to  the  highest  bidder,  and 


174  FOREIGN  EXCHANGE. 

he  rarely  experiences  any  difficulty  in  finding  a  ready  pur- 
chaser. 

Our  exporters,  in  competing  with  foreign  manufacturers, 
must  take  into  consideration  cost  of  transportation,  insur- 
ance on  goods,  custom  duties,  difference  in  value  of  money 
and  the  probable  price  at  which  they  can  discount  or  sell 
their  commercial  bill  against  same.  Time  credit  must  also 
be  extended  to  buyer.  If  our  exporters  had  to  wait  for  pay- 
ment until  maturity  of  their  bills,  it  would  mean  the  tying 
up  of  a  large  amount  of  capital  and  possibly  prevent  their 
competing  successfully. 

Process  of  Creation  and  Handling. 

The  process  by  which  a  foreign  commercial  bill  of  ex- 
change drawn  against  commodities  exported  is  created  and 
handled  and  reaches  its  termination,  may  be  best  illustrated 
by  an  actual  transaction,  and  I  have  obtained  for  such  pur- 
pose exact  copies  of  a  commercial  bill  of  exchange  drawn 
against  a  shipment  of  flour  made  by  a  leading  exporter — 
flour  being  one  of  our  chief  exportable  commodities. 

The  shipment  of  flour  in  question  destined  to  Liverpool, 
England,  was  delivered  to  the  Soo  freight  line  at  Minne- 
apolis, operating  over  the  Minneapolis,  St.  Paul  and  Sault 
Ste.  Marie  and  Canadian  Pacific  railroads,  and  a  through 
bill  of  lading  in  duplicate  was  obtained.  This  through  bill 
of  lading  is  a  form  of  contract,  issued  by  special  arrange- 
ments with  connecting  ocean  steamship  lines,  by  the  terms 
of  which  it  is  agreed,  under  conditions  printed  thereon,  to 
transport  the  shipment  through  to  destination  at  foreign 
port  (Liverpool).  It  states  the  number  of  packages,  how 
they  are  marked,  their  contents,  the  particular  grade  or 
brand  of  flour,  and  the  name  and  location  of  party  for  whom 
goods  are  intended.  It  is  negotiable  only  by  endorsement 
of  the  exporter. 

Upon  presentation  of  this  evidence  of  shipment  a  marine 
insurance  company  has  issued  a  certificate  of  insurance 
under  terms  of  which  they  agree  to  reimburse  the  owner  of 
goods  in  case  of  the  loss  of  shipment  by  fire  or  accident 
while  en  route  on  the  ocean.  This  shipment,  as  is  the  usual 
custom,  is  insured  about  10  per  cent,  in  excess  of  its  billed 
value. 

The  exporter  then  attaches  to  these  documents  a  draft 
for  amount  for  which  flour  was  sold,  namely,  £457  12s  lOd. 
Had  this  shipment  been  destined  to  a  point  in  Germany, 
the  draft  would  have  drawn  in  marks.  If  to  France,  in 
francs,  etc.  Usually  in  the  money  of  the  country  where  it  is 
going,  but  quite  often  it  will  be  drawn  in  English  money  al- 


I 


APPENDIX.  175 

though  going  to  some  other  country,  by  reason  of  English 
exchange  being  preferred. 

In  this  case  the  exporter  agreed  to  allow  the  buye/  60 
days  time  in  which  to  pay  draft,  after  its  presentation.  The 
draft  reads  "60  days  after  sight  of  this  first  of  exchange 
(second  unpaid),  pay  to  the  order  ot  ourselves  457  pounds 
12  shillings  and  10  pence,"  against  Soo  line  through  B.  L. 
No.  B.  1548,  dated  May  16,  1901,  for  2,000  sacks  of  flour 
branded  Dakota  and  is  signed  No.  West'n  Con's  Milling 
Co.  by  H.  E.  Kent,  cashier,  who  are  termed  the  drawers.  In 
the  left  corner  it  reads  "To  James  Corwith  &  Co.,  Liver- 
pool, Eng."  They  are  the  buyers,  or,  as  we  term  them,  the 
drawees. 

Now  these  three  documents,  drawn  to  the  order  of  the 
exporters  (No.  West'n  Consolidated  Milling  Co.)  comprise 
a  commercial  bill  of  exchange. 

Upon  the  same  day  that  these  documents  were  issued,  and 
practically  before  the  flour  has  started  on  its  long  journey, 
the  exporters  offered  this  bill  of  exchange  for  sale.  It  was 
sold  to  the  Security  Bank  of  Minneapolis  (they  being  high- 
est bidders)  at  the  rate  of  4.84  per  pound,  who  in  turn  re- 
sold it  to  the  American  Express  Company  at  $4.84^  per 
pound.    The  indorsements  on  the  back  of  the  draft  read: 

Northwestern  Consolidated  Milling  Co.,  H.  E.  Kent,  treas. 

Security  Bank  of  Minnesota,  Thos.  F.  Hurley,  cashier. 

Pay  to  the  order  of  the  National  Provincial  Bank,  Liver- 
pool, By  Jas.  F.  Fargo,  Treas. 

The  latter  indorsement  shows  the  papers  to  have  been 
sent  to  Liverpool  for  collection.  The  bank  at  Liverpool 
notified  Corwith  &  Co.  to  call  and  accept  the  draft,  which 
they  did,  by  writing  the  word  "accepted"  and  the  date  over 
their  signature. 

About  fifteen  days  afterward  the  flour  arrived  by  slow 
steamer,  and  being  in  immediate  need  of  it,  Corwith  &  Co., 
in  order  to  obtain  the  bill  of  lading,  had  to  pay  the  draft; 
the  instructions  stamped  on  same  being:  "Surrender  docu- 
ments upon  payment  only." 

Now  as  Corwith  &  Co.  paid  this  draft  forty-five  days  be- 
fore it  was  due,  the  bank,  as  is  customary,  allowed  them 
the  prevailing  rate  of  discount  applicable  to  that  class  of 
bills,  which  was  2  per  cent,  (or  £1  3s  5d).  The  difference, 
£456  7s  5d,  less  cost  of  revenue  stamps,  was  placed  to  the 
credit  of  the  American  Express  Co.  by  the  bank,  which 
closed  the  transaction. 

Had  the  instructions  on  draft  read:  "Surrender  docu- 
ments upon  acceptance  of  draft,"  the  bill  of  lading  would 
have  been  delivered  when  draft  was  accepted,  thus  enabling 


176  FOREIGN  EXCHANGE. 

Corwith  &  Co.  to  obtain  goods  at  once  and  pay  draft  60  days 
afterward  if  they  desired. 

The  method  used  in  determining  what  this  commercial 
bill  was  worth  when  buying  it  here  was  based  as  upon  the 
following: 

1st.  What  demand  exchange  upon  Liverpool  could  be 
sold  for. 

2d.  The  cost  of  revenue  stamps  to  be  affixed  when  draft 
was  accepted  abroad. 

3d.  The  interest  for  the  number  of  days  for  which  draft 
was  drawn,  plus  three  days  grace,  at  the  rate  per  cent,  bill 
could  be  discounted. 

For  illustration: 
$4.8775      Demand  rate  on  Liverpool. 

.00244     Cost  of  revenue  stamp  (1-20  of  1  per  cent,  of  rate 
or  1  shilling  per  100  pounds). 


$4.87506 
.01676        Interest  63  days  2  per  cent,  (discount  rate). 

$4.85830     Parity  or  cost  per  pound  at  maturity  or  if  dis- 
counted. 
4.84125    Rate  per  pound  at  which  purchased. 


.01705     Profit  per  pound. 
Or  $7.78  on  £457  12s  lOd. 

Buying  Foreign  Bills  of  Exchange. 

The  buying  of  foreign  commercial  bills  of  exchange  is 
the  principal  medium  of  bankers  and  foreign  exchange  deal- 
ers, in  placing  funds  to  their  credit  in  banks  abroad  against 
which  they  issue  checks,  drafts,  letters  of  credit,  etc.  It  is 
the  foundation  of  most  of  our  foreign  exchange  transac- 
tions. It  is  the  principal  source  of  profit  in  the  business. 
It  enables  manufacturers  to  sell  their  goods  abroad  for  cash 
in  advance. 

Foreign  bills  of  exchange  vary  as  to  conditions  of  pay- 
ments abroad.  If  conditions  of  sale  between  buyer  and 
seller  of  the  goods  was  that  goods  were  to  be  paid  for  upon 
delivery,  the  instructions  accompanying  the  bill  would  say 
"Documents  for  payment"  (expressed  d.  p.),  meaning  not 
to  deliver  the  bill  of  lading  (which  would  enable  drawee  to 
get  goods)  until  draft  had  been  paid. 

If  instructions  said  "Documents  for  acceptance"  (ex- 
pressed d.  a),  it  would  mean  bill  of  lading  could  be  delivered 
when  draft  was  accepted,  thus  enabling  drawee  to  obtain 


APPENDIX.  177 


goods  at  once  and  pay  draft  any  time  within  63  days  (if  a  60 
day  bill). 

The  buying  of  commercial  bills  of  exchange  can  only  be 
safely  undertaken  by  those  thoroughly  familiar  with  that 
business.  It  is  practically  equivalent  to  loaning  money 
upon  security  you  have  not  seen.  If  the  drawee  of  the  bill 
has  unquestionable  responsibility,  that  of  course  eliminates 
the  principal  risk  of  loss,  but  if  great  care  is  not  exercised 
in  examining  bills  purchased,  a  slight  imperfection  or  error 
might  cause  a  long  delay  in  adjusting  the  error,  thereby 
causing  loss  of  interest.  If  through  a  misunderstanding  or 
for  other  cause  goods  are  not  accepted,  they  have  to  be  sold 
to  best  advantage  for  account  of  owner  of  tne  bill,  and  pro- 
ceeds of  sale  are  applied  toward  payment  of  the  draft.  If 
there  is  a  deficiency,  it  is  collected  of  the  drawer  of  the 
bill — the  exporter.  The  buyers  of  commercial  bills  should 
know  the  market  value  of  the  goods  exported,  the  financial 
standing  of  the  drawer  or  exporter,  should  see  that  bill  of 
lading  is  correctly  dated,  corresponds  with  shipment  made, 
is  duly  signed  by  agent  or  proper  ofiicial  of  railway  or 
freight  line,  that  it  corresponds  with  insurance  certificate 
in  the  various  particulars,  that  if  more  than  two  copies  were 
issued  he  has  them  all,  that  there  are  no  printed  or  stamped 
conditions  thereon  that  would  be  likely  to  render  it  value- 
less under  possible  emergencies.  If  goods  are  perishable, 
see  that  they  are  routed  by  fast  freight  and  fast  steamers. 
If  bill  of  lading  only  covers  shipment  to  the  seaport,  as  is 
sometimes  the  case  when  shipped  from  small  inland  places 
where  through  bills  of  lading  are  unobtainable,  arrange- 
ments must  be  made  through  your  own  agent  to  have  same 
exchanged  for  ocean  bill  of  lading  at  seaport.  Any  error 
or  incompleteness  of  the  documents  will  cause  a  delay  in 
payment  or  expense  for  cablegrams  to  adjust  them. 

Hypothecation  Certificate. 
It  is  the  custom  of  large  buyers  of  foreign  commercial 
bills  of  exchange  to  exact  of  exporters  what  is  termed  a 
Hypothecation  Certificate.  This  certificate,  after  describ- 
ing the  nature  of  the  shipment  and  the  documents  in  ques- 
tion, states  in  effect  that  the  bill  of  lading  is  lodged  as  col- 
lateral security  for  the  acceptance  and  payment  of  the 
draft.  That  in  case  the  drawee  declines  to  accept  draft,  or 
it  is  not  paid  at  maturity,  the  owner  of  the  bill  is  author- 
ized to  place  the  property  described  in  the  hands  of  brokers 
for  sale  for  account  of  whom  it  may  concern,  and  apply  pro- 
ceeds toward  payment  of  draft  and  expenses  incurred,  and 
that  in  case  of  a  deficiency  the  seller  agrees  to  pay  amount 


178  FOREIGN  EXCHANGE. 


on  demand.  Sometimes  exporters  give  a  general  hypothe- 
cation certificate  to  apply  to  any  and  all  bills  of  exchange 
purchased  of  them. 

Certificates  of  insurance  on  shipments  exported  are  usu- 
ally for  a  sum  of  from  10  to  20  per  cent,  in  excess  of  the 
stated  value  of  the  goods.  They  should  be  carefully  examin- 
ed to  see  that  there  is  no  clause  which  would  render  insur- 
ance void  in  event  of  shipment  not  going  forward  at  a  spe- 
cified period,  or  that  it  would  expire  before  arriving  time 
of  goods  in  case  of  delay  or  by  reason  of  any  of  the  possi- 
ble emergencies  likely  to  arise. 

The  buyer  of  foreign  commercial  bills  of  exchange  must 
be  familiar  with  the  revenue  laws  and  commercial  customs 
of  all  the  foreign  countries,  as  well  as  the  various  rates  of 
discount  upon  the  several  classes  of  paper  as  they  change 
from  day  to  day. 

Discount  for  Certain  Classes  of  Bills. 

You  should  always  bear  in  mind  that  a  different  rate  for 
discount  applies  to  the  different  classes  of  bills.  For  in- 
stance— on  documentary  bills  where  documents  are  for  pay- 
ment, the  discount  or  rebate  rate  is  1  per  cent,  below  the 
Bank  of  England  official  minimum  discount  rate.  If  drawn 
on  firms  (not  bankers)  and  documents  are  for  acceptance, 
the  discount  rate  would  be  ^  of  1  per  cent,  above  the  pri- 
vate discount  rate  for  bankers'  bills. 

If  drawn  on  bankers,  whether  documentary  or  otherwise 
(which  are  always  for  acceptance),  the  discount  rate  would 
be  the  private  rate  of  discount,  which  fluctuates  according 
to  demand  and  supply  of  such  bills,  and  in  case  of  large 
transactions  it  is  customary  for  buyers  of  such  bills  here 
to  cable  their  correspondents  abroad  for  a  discount  rate  to 
apply  on  bills  to  arrive  by  next  mail  or  for  a  stipulated 
period  before  buying,  in  order  that  they  may  know  exactly 
at  what  rate  the  bills  can  be  discounted  upon  their  arrival. 
Without  such  previous  arrangement  the  discount  rate 
might  change  materially  and  result  in  loss  upon  the  trans- 
action. 

Bank  of  England  Official   Rate. 

The  Bank  of  England  official  minimum  discount  rate  is 
fixed  by  the  directors  of  the  Bank  of  England  at  their  meet- 
ings upon  each  Thursday  of  the  week,  and  their  decision 
usually  appears  in  the  financial  columns  of  our  daily  papers 
reading  thus:  "Bank  of  England  minimum  discount  rate 
unchanged,  or,  the  Bank  of  England  increased  (or  reduced) 
its  minimum  discount  rate  to  3  per  cent.,"  etc. 

The  private  discount  rate  is  the  rate  at  which  private 


I 


APPENDIX.  179 

banks  (meaning  all  those  in  Great  Britain  other  than  the 
Bank  of  England)  will  discount  bills  of  exchange  for  ac- 
count of  the  owners  or  last  endorsers,  and  this  discount  is 
governed  by  the  Bank  of  England  discount  rate,  and  also 
by  the  supply  of  bills  in  the  market  for  discount,  but  except 
under  unusual  conditions,  the  private  discount  rate  will  j 
always  be  about  i/4  of  1  per  cent,  below  the  Bank  of  Eng- 1 
land  official  minimum  discount  rate. 

What  are  known  as  "rebate  rates"  apply  only  to  time 
commercial  bills  of  exchange  drawn  on  firms  where  docu- 
ments are  for  payment;  that  is,  where  bill  of  lading  is  de- 
livered only  upon  payment  of  the  draft.  This  rebate  is  an 
allowance  made  to  the  payee  or  drawee  from  face  amount 
of  draft  if  paid  before  maturity,  or  before  due,  and  such 
rebate  is  1  per  cent,  below  the  Bank  of  England  official 
minimum  discount  rate. 

Theoretically  the  Bank  of  England  controls  the  discount 
market  in  London.  This  control  is  sought  to  be  maintained 
through  the  official  rate  of  discount  at  the  bank,  which  is 
advanced  when  its  stock  of  gold  bullion  is  being  largely 
drawn  for  export  to  United  States  or  European  countries. 
If  conditions  prevail  to  make  it  inadvisable  to  raise  the  bank 
rate,  a  higher  price  for  gold  will  be  charged,  or  if  it  finds 
difficulty  in  controlling  the  discount  rate,  it  will  create  a 
demand  for  discounts  by  borrowing  on  its  security,  thereby 
increasing  the  demands  for  discounts. 

Unlike  the  Bank  of  England,  which  undertakes  to  control 
the  stock  of  gold  by  advancing  the  discount  rates,  the  Bank 
of  France  protects  its  stock  of  gold  by  increasing  the  price 
of  gold  when  withdrawal  of  a  large  amount  is  threatened. 
The  official  discount  rate  of  the  Bank  of  France  which  con- 
trols the  market  rate,  rarely  changes  except  in  case  of 
financial  or  political  crises. 

Unsafe  Foreign  Bills  of  Exchange. 

Cotton,  on  account  of  the  different  grades  of  same,  and 
the  fact  that  there  is  so  great  a  difference  in  the  price  of 
the  different  grades,  and  its  being  so  easy  to  substitute  one 
grade  for  another,  the  bills  against  shipments  of  same 
should  only  be  purchased  of  well  known  and  responsible 
shippers  or  indorsers. 

Grain  shipments  are  all  right,  providing  the  grain  in- 
spector at  shipping  point  is  of  good  reputaton,  otherwise  he 
might  inspect  as  No.  2  what  was  billed  as  No.  1. 

Perishable  goods  are  always  more  or  less  risky,  on  ac- 
count of  danger  of  delay  and  goods  spoiling:.    You  should 


180  FOREIGN  EXCHANGE. 


see  that  perishable  goods  are  sent  by  fast  freight  lines  and 
fast  steamers. 

Pianos,  organs,  musical  instruments,  and  such  goods  have 
imaginary  values,  and  could  rarely  be  sold  at  price  at 
which  billed. 

Bankers  Reimburse  Bills. 

Bankers  reimburse  bills  is  where  drafts  are  drawn  against 
a  shipment  exported,  upon  a  banker,  the  documents  being 
for  acceptance.  When  buying  such  bills  you  should  keep  a 
record  showing  names  of  indorsers  and  keep  close  watch 
of  the  drawer  or  shipper  until  bill  is  paid.  The  shipper 
should  be  responsible,  and  if  buying  a  considerable  amount 
of  such  bills  on  the  same  drawee,  you  should  ascertain 
through  your  correspondent  abroad  the  responsibility  of 
the  drawee,  and  be  sure  you  do  not  buy  more  bills  against 
a  single  drawee  than  his  ordinary  business  requirements 
would  indicate  he  needed. 

Banks  selling  commercial  bills  of  exchange  (documen- 
tary), sometimes  stamp  them,  for  example:  *ln  case  of 
need  with  the  Bank  of  Scotland,  London,"  or  some  other 
bank.  This  is  done  to  avoid  charge  of  intermediate  banks 
for  endorsing  or  protesting  drafts,  which  charge  is  usually 
very  exorbitant.  When  so  stamped  it  is  a  notice  to  all 
holders  of  the  draft  they  may  call  upon  the  bank  named  if 
draft  is  not  promptly  accepted  or  honored,  for  relief,  there- 
fore there  is  no  necessity  for  protesting.  The  bank  men- 
tioned will,  by  prev^ious  arrangement,  always  honor  such 
drafts  and  charge  to  account  of  the  bank  endorsing  such 
notation  thereon. 

Clean  Bills. 

Clean  bills  of  exchange  are  those  having  no  bill  of  lading 
attached,  although  they  may  have  attached  the  insurance 
certificate  and  an  invoice  of  shipment.  If  these  clean  bills 
are  drawn  upon  firms,  they  are  subject  to  a  discount  rate 
of  1^  of  1  per  cent,  above  the  private  discount  rate  of  the 
day,  but  if  drawn  upon  bankers,  they  will  be  discounted  at 
the  private  discount  rate. 

Commercial  bills  of  exchange  drawn  by  exporters  without 
documents  are  generally  upon  their  own  house  or  branch 
abroad,  and  are  against  funds  which  have  accumulated  to 
their  credit  from  payments  for  shipments  previously  made. 
Exporters  before  selling  their  own  bills  of  this  kind  usually 
wait  until  the  rates  for  exchange  here  are  high.  Such  bills 
are  discountable. 

Commercial  bills  of  exchange  drawn  upon  bankers  are 
always  for  acceptance  unless  otherwise  specified,  and  the 


APPENDIX.  181 

discount  rate  applying  to  such  bills  is  the  private  discount 
rate  of  the  day. 

Bills  That  Cannot  be  Discounted. 

Documentary  commercial  bills  of  exchange  drawn  upon 
firms  or  banks  where  documents  are  for  payment,  cannot 
be  discounted  upon  the  market,  as  in  the  case  of  such  bills 
where  documents  are  for  acceptance  for  the  reason  banks 
abroad  to  whom  bills  are  sent  for  collection  will  not  under- 
take to  discount  commercial  bills  unless  they  are  what  is 
called  "clean"  bills — that  is,  those  having  no  documents  or 
those  which  permit  the  documents  to  be  delivered  when 
the  draft  is  accepted  by  drawee. 

A  documentary  or  commercial  bill  of  exchange,  accompa- 
nied by  instructions  from  the  exporter  or  drawer,  to  deliver 
documents  (bill  of  lading,  etc.)  only  upon  payment  of  the 
draft  by  the  importer  or  drawee,  which  are  drawn  upon  a 
firm,  are  subject  to  a  discount  rate  of  1  per  cent,  below  the 
Bank  of  England  official  minimum  discount  rate.  If  the 
instructions  are  to  deliver  documents  upon  acceptance  of 
draft,  the  same  rate  of  discount  applies,  unless  the  drawee 
is  of  very  good  financial  standing,  in  which  case  the  bill 
may  be  discounted  by  the  holder  (bank)  at  V4,  of  1  per  cent, 
above  the  private  discount  rate  of  the  day. 
Foreign  Revenue  Laws. 

Drafts  drawn  in  the  United  States  payable  in  foreign 
countries  are  subject  to  revenue  laws  of  such  foreign  coun- 
tries, and  the  cost  of  stamps  so  affixed  abroad  must  be  paid 
by  the  holder  of  the  bills,  who  in  turn  generally  charge  to 
the  bank  or  banker  from  whom  they  receive  same  for  col- 
lection. The  amount  of  revenue  varies  according  to  the 
country.  The  following  shows  cost  on  other  than  demand 
drafts  in  principal  foreign  countries: 

Great  Britain  Is  per  £100  or  fraction  thereof,  or  1-20  of  1 
per  cent,  of  the  rate. 

Germany  50  pfennigs  per  1,000  marks  or  fraction  thereof, 
or  1-20  of  1  per  cent,  of  rate. 

France  50  centimes  per  1,000  francs  or  fraction  thereof, 
or  1-20  of  1  per  cent,  of  rate. 

Belgium  50  centimes  per  1,000  francs  or  fraction  thereof, 
or  1-20  of  1  per  cent,  of  rate. 

Holland  50  cents  per  1,000  gulden  or  fraction  thereof,  or 
1-20  of  1  per  cent,  of  rate. 

Norway,  Sweden  and  Denmark  50  ores  per  1,000  kroner 
or  fraction  thereof,  or  1-20  of  1  per  cent,  of  rate. 

Italy  Vs  per  cent,  of  rate  or  $1.13  per  $1,000. 

Eussia  V4  per  cent,  of  rate  or  $1.25  per  $1,000. 


182  FOREIGN  EXCHANGE. 

Austria-Hungary  %  per  cent,  of  rate  or  $1.13  per  $1,000. 
Switzerland  varies  at  different  places — some  places  have 
none. 

The  cost  of  revenue  stamps  required  to  be  affixed  to  com- 
mercial bills  in  Great  Britain  at  time  of  acceptance  of  draft 
Is  Is.  for  each  £100  or  fraction  of  £100,  which  is  equiva- 
lent to  y2  per  mille,  or  i/^  per  cent,  per  £  1,000,  or  1-20  of  1 
per  cent,  of  the  rate,  which  latter  expressed  decimally  when 
rate  is  $4.83  per  pound  would  be  .00244  (or  488  divided  by 
1-20  of  1  per  cent).  Where  the  amount  of  bills  is  small,  say 
£1,000  and  under,  it  is  safe  to  deduct  %  cent  per  pound 
to  cover  cost  of  revenue  stamps. 

On  short  bills — 5  days  sight  or  less,  only  one  penny 
stamps  (2  cents)  are  required. 

Banks  abroad  are  noted  for  charging  for  every  item  pos- 
sible in  connection  with  every  transaction  handled.  Such 
items  as  postage  on  letters  sent  to  you  during  a  certain 
period,  cost  of  cablegrams,  check  books,  envelopes,  sta- 
tionery, and  often  a  lump  sum  for  items  that  may  have  been 
overlooked.  For  collecting  commercial  bills  of  exchange 
they  will  usually  charge — in  England  about  1-20  of  1  per 
cent.,  or  1  shilling  per  cent.;  in  France  1-16  per  cent.;  Ger- 
many 1-20  per  cent,  in  the  larger  places  and  from  1-16  to  % 
per  cent,  in  the  smaller  places. 

Bill  Sent  Abroad  by  Drawer. 

Exporters  frequently  draw  bills  of  exchange  and  send  the 
original  bill  of  lading  direct  to  the  drawee  abroad  and  at- 
tach the  duplicate  bill  of  lading  and  issuance  certificate  to 
the  draft,  which  they  sell  upon  the  market.  Such  bills,  if 
drawn  upon  merchants,  are  subject  to  a  discount  rate  of  ^ 
of  1  per  cent,  above  the  private  discount  rate.  The  object 
of  drawing  bills  in  this  manner  is  to  avoid  payment  of  in- 
ternal revenue  stamp  duty  of  2  cents  per  $100,  as  required 
under  our  revenue  laws. 

Interest  at  30,  60  or  90  days,  with  3  days  grace  added  (as 
allowed  throughout  Great  Britain),  can  easily  be  arrived  at 
by  using  printed  tables  furnished  free  by  some  of  the  lead- 
ing foreign  exchange  bankers,  which  give  the  proper  deci- 
mal of  a  pound  to  deduct  for  interest  and  revenue  stamp  at 
the  various  rates.  These  printed  tables  also  give  the  same 
information  for  figuring  German  and  French  bills  of  ex- 
change. 

Exchange  transactions  become  more  complicated  when 
one  country  or  place,  as  is  often  the  case,  discharges  its 
debts  through  another  country  by  means  of  bills  of  ex- 
change drawn  upon  a  third  country  or  place.    As  for  in- 


APPENDIX.  183 


stance,  a  merchant  in  Chicago  importing  goods  from  China 
would  pay  the  exporter  in  China  with  a  check  upon  London, 
for  the  reason  that  such  check  would  he  more  desirable  to 
the  shipper  in  China,  since  the  demand  for  exchange  in 
China  is  greater  upon  London  than  upon  the  United  States. 

When  in  any  marKet  the  demand  for  exchange  on  a  cer- 
tain country  or  place  is  greater  than  the  supply,  the  defi- 
ciency is  usually  supplemented  by  bills  on  other  countries 
having  a  more  favorable  exchange  with  the  latter. 

In  the  East  Indies,  those  who  ship  to  America  usually 
draw  upon  London  instead  of  America.  In  New  Orleans, 
exporters  of  cotton,  etc.,  to  Russia,  draw  upon  London  in- 
stead of  St.  Petersburg.  This  is  because  England  does 
more  business  with  those  countries  than  America;  besides, 
London  is  regarded  as  the  greatest  money  center,  and  ex- 
change upon  that  city  is  usually  more  favorable,  asid  cfts  be 
used  to  better  advantage. 

Importers  In  Germany. 

Importers  in  Germany  will  not  accept  drafts  drawn 
against  importations,  until  the  duplicate  documents  (dupli- 
cate draft,  bill  of  lading,  etc.),  are  presented,  and  in  order 
to  have  the  original  draft  accepted  immediately  upon  Its 
arrival,  banks  in  this  country  when  forwarding  such  bills 
for  acceptance  and  collection  will  attach  to  the  original 
draft  a  memorandum  ^agreement  to  the  effect  that  the  dupli- 
cate bill  of  lading  is  in  their  possession,  and  their  corres- 
pondents (banks)  are  requested  to  guarantee  the  acceptors 
(importers)  that  the  duplicate  documents  will  be  delivered 
to  them  as  soon  as  received,  which  guarantee  also  gives 
the  number  and  amount  of  draft,  the  name  of  drawer  and 
the  signature  of  a  proper  official  of  the  bank  o?  financia] 
institution  forwarding  same. 

The  volume  of  transactions  in  French,  German  and  other 
continental  exchange  is  quite  small  compared  with  that 
of  sterling  exchange.  The  reason  for  this  is  that  most 
banks  have  accounts  or  balances  only  at  London,  and  where 
balances  are  kept  in  other  European  cities  they  are  usually 
small  as  compared  with  their  London  account.  Therefore, 
in  making  remittances  to  Paris,  Berlin  or  othe?  cities  ©n 
the  continent,  it  is  most  generally  effected  by  tmnsferriag 
the  funds  to  those  cities  from  London,  which  cas  generally 
be  handled  very  satisfactorily,  by  reason  of  most  large  Eu- 
ropean banks  having  branches  in  London.  It  is  customary^ 
however,  for  banks,  before  transferring  funds  from  their 
London  accounts  to  carefully  figure  out  the  difference  in 
cost  between  a  remittance  direct  from  here  to  the  city  where 
it  is  desired  to  place  the  funds,  and  the  expense  of  transfer- 


184  FOREIGN  EXCHANGE. 

ring  same  from  London.  This  can  easily  be  determined  by 
ascertaining  the  rate  of  exchange  between  London  and  the 
point  referred  to. 

A  crossed  sterling  check  is  one  payable  either  to  bearer 
or  order,  having  the  name  of  a  banker  or  two  parallel  lines 
and  the  abbreviation  &  Co.  written  or  printed  across  the 

face,  thus:  &  Co.    The  effect  is  to  direct 

the  bank  upon  whom  it  is  drawn  to  pay  same  only  when 
coming  to  them  through  some  other  bank.  It  is  intended  as 
an  additional  safeguard  against  wrong  payment. 

In  most  foreign  countries  it  is  the  custom  of  bankers  and 
others  in  the  cashing  of  checks,  whether  drawn  payable  to 
order  or  bearer,  to  pay  to  the  person  presenting  same,  and 
under  the  laws  existing  in  these  countries,  the  paying  bank 
or  banker  would  noo  be  held  liable  for  wrong  payment.  As 
a  reason  for  this  seemingly  risky  method,  it  is  claimed  that 
on  account  of  the  very  se\er6  penalty  imposed  for  rorgery 
under  their  laws,  the  requiring  of  strict  personal  identifi- 
cation, as  exacted  by  banks  in  the  United  States,  is  founa 
unnecessary. 

As  an  additional  precaution  against  wrong  payment,  the 
laws  of  Great  Britain  require  that  where  a  check  is  crossed, 
as  explained  above,  while  not  requiring  personal  identifica- 
tion, it  must  be  cashed  through  some  bank  other  than  the 
one  upon  which  it  is  drawn. 

Notwithstanding  the  requirements  under  the  laws,  we 
presume  a  reasonable  amount  of  care  is  exercised  by  banks 
to  prevent  losses  by  incorrect  payment,  and  we  are  inform- 
ed that  in  some  countries,  strangers  presenting  checks 
drawn  to  their  order,  are  required  to  make  afladavit  that 
they  are  the  person  named,  for  which  aflfidavit,  the  paying 
bank  exacts  a  small  fee. 


1>^ 


^iJiuajaisiii**'^ 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 
BERKELEY 

Return  to  desk  from  which  borrowed. 
This  book  is  DUE  on  the  last  date  stamped  below. 


'49  «i 


0ct6'49«| 


^Nla^59RHiM^'^9PlSCMAy08'92 


REC'D  LDl 

HAY  2  /  i. 


MAY  08 1993 


LD  21-100m-9,'48(B399sl6)476 


YB   18074 

U_C  BERKELEY  LIBRARIES 


CD3^17tflqD 


4      / 


r 


THE  UNIVERSITY  OF  CAUFORNIA  UBRARY 


